Institutional Investor 2013-9-20Hard-liners including Mohammed Morsi seized control of the group prior to the Arab Spring but proved inflexible and incompetent in power.

Ali Ashmawi was a harvest of human wreckage. It was August 2006, and I had traveled to his remote, unnamed village — two hours from Cairo by car and a good half an hour from the nearest paved road — to learn more about the Muslim Brotherhood. Ashmawi, then 69, a devoted-member-turned-fierce-critic of the Brotherhood, bore visible scars from nearly a decade in Egypt’s gulag. His apartment was small but tidy, and his two young children, a son and a daughter, sat together on a couch and listened to his story as if hearing it for the first time.

A baker’s son, Ashmawi had joined the Brotherhood as a teenager in 1951 and rose to become a senior cadre in the group’s underground militia by the early 1960s. Fatefully, he joined a rogue plot to assassinate Gamal Abdel Nasser, the secular strongman then ruling Egypt, along with fellow conspirator Sayyid Qutb, the radical intellectual whose hard-line interpretations of Islam would inspire some of the Middle East’s most notorious terrorist groups, including al-Qaeda. The plot was foiled in 1965, and Nasser retaliated with a brutal crackdown on Brotherhood leaders.

In a low monotone, Ashmawi explained how he was stretched on a rack day and night for six months, denied a copy of the Koran and held in solitary confinement for weeks at a time. He pulled up his white short-sleeved shirt to show the scars on his back from relentless beatings; his listlessness testified to the emotional toll of his torture and isolation. Qutb was executed in 1966. Ashmawi was released from prison after nine years, and ever since has been a staunch critic of the Brotherhood (Ikhwan, as it is known in Arabic).

“If the Brotherhood became a ruling party, it would be a disaster,” Ashmawi told me. “It would scrap the peace treaty with Israel and impose a tax on Christians. This is an extremist group with stockpiles of weapons that will become a terrorist organization when it comes time.”

A year earlier, in 2005, Egypt’s president, Hosni Mubarak, had unleashed a fresh crackdown on the Ikhwan after its members polled well in parliamentary elections. I asked Ashmawi how the group could seize power when so many of its members were either in jail or under house arrest. He thought for a moment, then shrugged. “They’ll probably be voted in,” he said.

Until the Arab Spring toppled the region’s established political order, the Muslim Brotherhood was the closest thing to an authentic grass-roots movement in the Arab world. Secularists and Islamists alike respected the group for its incorruptibility; its genuine regard — conspicuously lacking among the region’s cohort of dictators and emirs — for the poor and underprivileged; and its regular, peaceful and at least semidemocratic transitions of power. After Mubarak’s overthrow in 2011, even secular Egyptians believed that the Brotherhood, having suffered more in resistance than any other constituency, had earned its chance to lead. When the Ikhwan’s Mohamed Morsi won a narrow victory to become Egypt’s first freely elected leader last June, he enjoyed a genuine popular mandate.

Barely a year later, the Brotherhood is widely reviled and drastically diminished. Most of its leaders are in prison and awaiting trial after a military coup in July. Hundreds of its rank-and-file members have been killed by soldiers and police, either huddled together with peaceful protesters or picked off one by one in gun battles. General Abdel Fattah al-Sisi, the army commander who led the putsch, is hailed by many Egyptians as a liberator; some analysts predict he will be the country’s next leader, either by seizing power as a dictator or by entering an election that he would almost certainly win. The interim government is mulling whether it should declare the Brotherhood a terrorist organization and dissolve it, a move that would most certainly radicalize what remains of the group and drive it deep underground.

It is a striking denouement for a sociopolitical movement that, since its formation in 1928, was alternatively persecuted by despots or locked in thorny alliances with them. Allegations of Brotherhood links to extremism are as common as they are unproven — despite Ashmawi’s warnings, the Ikhwan’s militias, if they exist at all, have yet to reveal themselves. Similarly, the group’s reputation for cool competence has turned out to be grossly inflated. The group’s demise was largely of its own making, the product of a internal split between liberals and Islamist hard-liners.

The Brotherhood’s brief rise to power and subsequent downfall was also assisted by third parties, particularly the U.S. government. Successive presidents could have pre-empted the 2011 revolution by demanding that Mubarak implement political reforms, but they recoiled from doing so lest such reforms lower the drawbridge to an Islamist government that would resume hostilities with Israel. (In fact, the Morsi government carefully preserved Egypt’s 1979 peace treaty with Israel.) Washington continued to indulge Mubarak despite the looming specter of a power struggle. By the mid-2000s, both the military and the Ikhwan were staunchly opposed to Mubarak’s grooming of his son Gamal as his successor. Popular antipathy to the regime deepened when cronies of Mubarak grabbed most of the spoils from the government’s economic reforms.

As early as 2008, political activist Osama al-Ghazali Harb warned me of the “general chaos” to come if Mubarak continued to resist a democratic transfer of power. He predicted the Ikhwan would leverage the situation to its advantage. Harb and his fellow secularists appealed to Washington to pressure Mubarak for gradual political reform, which would allow them to mobilize politically and eventually rival the Brotherhood for hearts and minds. Only that way, he argued, could a violent reckoning be avoided.

Years earlier, the U.S. flirted with but eventually abandoned any real effort to promote reforms. In 2005, Mubarak grudgingly permitted national elections in response to pressure from President George W. Bush, but when Brotherhood-affiliated candidates dominated the results, Bush lost his appetite for a democratic Arab world and imposed a de facto ban on U.S. dialogue with Ikhwan leaders. When the Arab Spring erupted in Cairo in 2011 and the Brotherhood emerged as the dominant political force, as Harb had predicted, Washington found itself largely ignorant of the men who would soon be running the Arab world’s most influential country. U.S. officials were blind, in particular, to the fault lines inside the Ikhwan.

Those fissures widened in 2010, when Mohammed Mahdi Akef stepped down as the Brotherhood’s seventh Supreme Guide. Akef had been an unusually progressive and high-profile leader, having encouraged group members to participate in politics and establish relations with non-Islamists. His deputy and presumptive successor, Mohammed Habib, was a leading liberal with plans to animate the Ikhwan’s ossified ruling culture with oxygen and light. “I had a vision that the group would meet in the open for everyone to see, that it would reach out and form alliances with secular and liberal groups,” Habib told me in 2011. “But others, both in the Brotherhood and in the regime, wanted us to remain in the shadows.”

By then, the group controlled 80 seats in Parliament, the largest minority bloc. Their representatives were, as the democracy activist Saad Eddin Ibrahim once told me, “responsible, fair, honest and predictable men.” Mubarak stepped up his war against the Brotherhood, however, jailing hundreds of its members on flimsy grounds and torturing many. With little to show for the group’s engagement in politics, Brotherhood conservatives opposed to Akef’s legacy of outreach and moderation quietly organized a coup against the leadership.

On one side of the schism were Habib and his allies, most prominently Abdel Moneim Aboul Fotouh and Ibrahim al-Zaafarani, both prominent doctors in Egypt’s medical associations, and the dissident writer Kamal Helbawy, who wanted to level the Brotherhood’s top-down hierarchy by allowing its younger members a greater say in group affairs. Opposing these liberals were doctrinaire members led by Khairet El-Shater, then in prison, a powerful industrialist known for his peculiar blend of pragmatism in economic affairs and dogmatism in matters of religion. Last year, in two interviews of more than 90 minutes each, El-Shater outlined for me his Renaissance Project, a multipronged plan to liberalize Egypt’s economy, rebuild its infrastructure, deregulate its markets, increase exports and modernize its tourist and agriculture sectors. He was flanked by two interpreters and three stenographers, and he rarely paused to take questions.

Al-Zaafarani once recalled for me the polemical jousts he and El-Shater engaged in while in prison, which for the Ikhwan has traditionally served as both theological salon and recruiting ground for new members. They were joined by Aboul Fotouh, himself a pragmatist but minus El-Shater’s imperiousness. “We’d talk every day,” said al-Zaafarani. “We’d have long discussions about the great personalities of modern Egypt, beginning with [Ikhwan founder] Hassan al-Banna, Nasser and Qutb. Aboul Fotouh and El-Shater disagreed on many things but they both agreed that Qutb radicalism should be rejected.”

Weeks before the election for the next Brotherhood Supreme Guide, Habib was alerted by informants within the country’s security apparatus that he would be denied the job. He was edged out in the voting by Mohammed Badie, an obscure Brotherhood member widely regarded as a cipher for El-Shater and his subalterns, Morsi and Saad El-Katatni, the group’s leading parliamentarian. According to Habib, Badie and his allies agreed to support a dynastic succession of power if Mubarak ended his campaign of oppression against the Brotherhood. In his acceptance speech, according to Habib, Badie issued a tacit endorsement of Gamal Mubarak, and later praised Hosni as “the father of Egypt.” (In a 2012 interview, El-Katatni said Badie’s remarks were misrepresented in the media and that the leadership never wavered in its opposition to a dynastic succession.)

In the months that followed, several of Badie’s allies were released from prison. Habib and other moderates were marginalized, and a rebellion among the Ikhwan’s restive younger members was snuffed out. Dissent of any kind was ruthlessly silenced. It was this Ikhwan — one run by men who, according to former Ikhwan member Tharwat El-Kherbawy, believed “it is not right for anyone to live his life unless he belongs to the Brotherhood” — that would steer the group through the riptides of postrevolutionary Egypt.

Seduced by a power vacuum that the Brotherhood, with vast political and commercial resources at its command, was uniquely qualified to fill, senior members plunged into the void and committed one blunder after another. They assured nervous Egyptians that the group’s members would contest no more than 15 percent of the seats in Parliament, only to triple that ratio weeks later. The group prohibited its members from running for president, but when Aboul Fotouh declared he would do so as an independent, the leadership expelled him from the Brotherhood, along with a cadre of younger members who had launched their own political parties, some in league with secularists and liberals. Over time, the Ikhwan would lose some of its most respected members, including al-Zaafarani and Helbawy as well as Aboul Fotouh, many of whom resigned from the group in disgust over the group’s naked power grab.

By early 2012, Brotherhood members dominated the newly elected Parliament and made El-Katatni its speaker. In March, El-Shater announced his own bid for the presidency, contradicting previous assurances that he had no ambitions for high office. Two weeks later, the Electoral Commission barred him from running on a technicality (he had been released from jail only a year earlier, well short of the six-year period required for presidential contenders with felony convictions), and Morsi stepped forward as the Brotherhood candidate. The 61-year-old engineer squeaked past a divided liberal opposition in the first round of voting, then won the runoff ballot in June with a margin of less than 2 percentage points over his opponent, Mubarak crony Ahmed Shafik.

The new president wasted no time alienating and antagonizing nearly all of Egypt’s non-Islamist constituencies. He snubbed liberal groups who actively supported him in the election’s final round. He ignored a petition, drafted and signed by some of the country’s most respected activists, calling for a coalition government and assurances that rights for women and the country’s minority groups, particularly its Christian community, would be respected. He granted himself unlimited power in response to what he said were the predations of Mubarak-era holdouts, which included the power to legislate without judicial oversight or review. He issued a declaration that effectively barred the judiciary from any role in the drafting of a new constitution by a committee that was dominated by Islamists. In response, the few liberals and secularists on the committee resigned, claiming Morsi was paving the way for Sharia law.

Morsi even squandered support from Islamists, particularly for his neglect of Egypt’s failing economy. Convulsions from the 2011 revolt sparked a flight of hard currency from the country as growth slowed to a crawl, joblessness rose, and shortages of food and fuel grew widespread. Incredibly for a group that draws much of its membership from Egypt’s bourgeoisie, Morsi all but ignored the pressing need to revive growth. Slogans inspired by El-Shater’s Renaissance Project, recited relentlessly during the campaign, disappeared once Morsi, who apparently doesn’t share his mentor’s enthusiasm for grand master plans, was sworn into office.

In December 2012, Morsi failed to win Islamist support for a $4.8 billion bailout package from the International Monetary Fund, conditioned as it was on painful reforms like cuts in subsidies. Instead, he turned to allies like the Gulf emirate of Qatar, which seeks to extend political Islam throughout the Arab world. Though such funding kept the Egyptian economy afloat, the political motive behind it did little to restore investor confidence. On the eve of the coup, an Egyptian economist complained to me that “not a single economic decision has been taken” since the revolution. “Investors like a certain amount of certainty, yet there is no talk of economics, just politics.”

For much of the 19th and 20th centuries the Arab world was a Franco-British fiefdom run by a clutch of pliant kings and emirs. The postwar nationalist governments that followed failed after their disastrous 1967 war with Israel and were replaced by a generation of Baath Party dictators, corrupt monarchies and petty despots. Having outlived them all, the Muslim Brotherhood seized its moment after Mubarak’s removal, only to collapse after a single year in power. In fact, the Ikhwan’s demise really began with the election that empowered Badie and his allies, who lacked in restraint and competence what they had in ambition and cunning. Just as Akef’s policy of outreach had provoked Ikhwan hard-liners, so did Morsi’s overreach trigger the coup that destroyed not only his presidency but also Islamist governance in general, and perhaps even the Brotherhood itself.

It is tempting to suggest that the future of Egyptian politics belongs to former Ikhwan members like Aboul Fotouh and al-Zaafarani as well as former members of the group’s youth wing, who are now leading their own parties and are working closely with non-Islamists. The Egyptians remain, after all, a deeply religious people who are likely to demand that their leaders remain piously Islamic. (Even General al-Sisi understands this, having made the point in a thesis he wrote while on a U.S. military fellowship in 2006.)

Nevertheless, with Egypt’s interim government now actively persecuting its critics as traitors, even moderate ex-Brotherhood members would be wise to keep their heads down. So thoroughly did the Ikhwan leadership discredit the group that it will take years for Islamists of any stripe to establish themselves politically, even those who were shrewd enough to have left the bus before hard-liners drove it off a cliff.

MITCHELL BELFER WAS ATTENDING AN energy conference at the University of Nicosia last November when he was struck by the way Cypriots talked about the country’s offshore gas field. Cyprus’s debt problems had yet to seize the attention of European officials and global markets, but local energy experts and academics were already attributing almost mythical powers of salvation to the field, dubbed Aphrodite after the Greek goddess of beauty.

“They knew the crisis was coming, and they assumed they could export their way out of it by exporting gas,” says Belfer, head of the international relations department at Metropolitan University Prague, who was in the capital, Nicosia, on an academic exchange. “They talked about how ‘our gas’ was not to be shared, not with Northern Cyprus or the European Union, and that export sales would come streaming in before the collapse. I wasn’t prepared for that kind of hubris.”

Cypriot self-intoxication had been mounting for years, along with the country’s global profile and living standards. In 2001 it was designated an advanced economy by the International Monetary Fund. Later, the government rebuffed attempts by the United Nations and the European Union to reunify the island in 2004, allowing Cyprus — the ethnic Greek country that occupies the southern two thirds of the island — to join the EU that year and leaving out the breakaway Turkish republic in the north. Nicosia fostered the country’s growth as an offshore financial center, transforming Cyprus from a sleepy Mediterranean enclave into a banking haven for Russian oligarchs. It forged a strategic alliance with Israel and outmaneuvered Turkey to negotiate an Exclusive Economic Zone (EEZ) with other countries, including Lebanon and Egypt, guaranteeing it a generous share of the Eastern Mediterranean’s gas riches. Cyprus joined the euro zone in 2008.

Over the past few months, however, Nicosia has been devastated by the downfall of its economy and wrong-footed by geopolitical turns. A sharp decline in local property prices and steep losses on holdings of Greek government bonds left Cyprus’s banks on the verge of collapse earlier this year, with the government incapable of rescuing them. Desperate to avoid the draconian terms of an EU bailout deal, Nicosia appealed to Moscow for assistance, offering a share of Cyprus’s energy resources in compensation, only to be turned down. The government was forced to turn to the EU and the IMF for a €10 billion ($13 billion) bailout in late March.

Under the terms of its bailout, Cyprus faces years of austerity and a dramatic shrinking of its banking sector, including the winding down of Laiki Bank, the country’s second-largest lender. It’s not surprising that Cypriots are looking to offshore gas to provide a lifeline.

Aphrodite is believed to contain as much as 8 trillion cubic feet of gas, enough to support the country’s 850,000 inhabitants for a century or generate up to $80 billion in export earnings, based on current prices. Cyprus will have difficulty exploiting the field, though. Officials exclude the idea of a pipeline to Turkey because of icy relations between the two governments. Nicosia wants instead to build a liquefaction plant to export its gas by ship, but such a plant could cost half of the country’s gross domestic product to build and would be expensive to operate.

Other developments also threaten Cyprus’s ability to exploit its energy resources. Just as Cyprus was finalizing its bailout deal, Israel and Turkey declared that they had agreed to settle a four-year-old diplomatic feud; that rapprochement revived talk of a natural-gas pipeline between the two countries that could effectively undercut the value of Cypriot gas. Meanwhile, Egypt’s new Islamist government has called for an extension of its EEZ borders at Cyprus’s expense.

Cyprus also confronts a threat from the shale-gas revolution in the U.S. and elsewhere, which some energy experts think will usher in a new era of cheap fuel. Aphrodite, which officials believed would save Cyprus, now seems to offer at best a distant hope.

“Hydrocarbons are not an immediate out for Cyprus,” says Laura Le Cornu, a partner at Strata Insight, a Nicosia-based oil and gas consulting firm. “The Russians did not give them an out, the EU would not consider Aphrodite as collateral, and there are high expectations now for a pipeline between Israel and Turkey. Whatever obstacles Cyprus faced before are even more prominent now.”

The country’s plight is at least as daunting as that of any of the other recipients of EU-IMF bailouts. The EU specifically aims to prune Cyprus’s financial sector, which had swollen to eight times the size of the country’s GDP, making it too big to save. The sector has already shrunk by a third, and it will diminish further as officials wind down Laiki and impose stiff haircuts on uninsured depositors. The government is raising taxes and shedding employees in a bid to help bring down the debt. Economic output is forecast to contract by 12.5 percent over the next two years — and that’s if the bailout is successful. In April, Nicosia announced it would sell $400 million in gold from its reserves to help repay creditors.

The aftershocks of the EU plan have been so traumatic that residents are comparing their reduced conditions to the deprivations that followed Turkey’s invasion of Cyprus and the island’s subsequent division 40 years ago. “The war did to Cyprus physically what the bailout will do financially,” says Le Cornu.

Considering those circumstances, it’s not surprising that Cypriots have focused on Aphrodite’s potential. Developing the gas field could give their country a lifeline. The EU should have an equal interest in seeing the gas field brought on stream given that its member states are eager to reduce their dependence on Russian natural gas. Cyprus, which many residents like to refer to as “the eastern frontier of Western civilization,” could be a politically stable source of energy. Nicosia has already issued drilling licenses to two major European energy companies: Italy’s Eni and France’s Total. Cyprus hopes to be pumping gas for customers at home and abroad by the end of the decade.

By opting to develop Aphrodite unilaterally, however, the country has denied itself the cheapest and most efficient way of tapping export markets. The best chance of maximizing Aphrodite’s resources, analysts and academics say, is for the island’s Greek and Turkish sides to unite, economically and politically, and share in the spoils. But such a scenario seems far-fetched.

“This should be a win-win situation,” says Hubert Faustmann, an associate professor of history and political science at the University of Nicosia. “The best option is to solve the Cypriot dispute and build a pipeline through Turkey. Instead, Nicosia is going ahead with a plan to distribute liquefied gas. If fuel prices end up going down, what will the Cypriots do?”

MODERN CYPRUS WAS BORN IN 1974, when, after years of rising ethnic tensions between Cyprus’s Greek and Turkish communities, Cypriots working with the support of Athens staged a military coup that they hoped would lead to a union with Greece. In response, Turkish forces invaded the north of the island and established the Turkish Republic of Northern Cyprus. Since then the island’s majority Greek and ethnic Turkish populations have lived in separate realms. The prosperous, Greek-dominated Republic of Cyprus, which accounts for a majority of the island’s residents, commands de jure sovereignty over the island and its coastal waters, while the isolated and impoverished Turkish Republic of Northern Cyprus is recognized only by Ankara.

When Aphrodite was discovered nearly three years ago, Cyprus set about developing the field with little regard for its northern neighbor. This provoked Turkey’s government, which has never recognized the Republic of Cyprus or its maritime borders. Ankara has declared it would respond forcefully to continued energy exploration unless the “inherent and equal rights” of the Turkish Cypriots to hydrocarbon finds are respected. It has proposed that the two sides either suspend development of Aphrodite pending a resolution to the island’s long-standing political divide or jointly develop and manage its resources under U.N. supervision. It has also proposed that Cyprus export its gas to Europe via undersea pipeline to one of Turkey’s main ports. Nicosia has rejected both offers.

Cyprus strengthened its ties with Israel just as relations between Ankara and the Jewish state cratered in May 2010, when Israeli commandos killed nine activists aboard the Mavi Marmara, a Turkish-flagged relief ship bound for Gaza. Earlier this year Ankara warned it would act against any moves by Cyprus to develop Aphrodite unilaterally, particularly if it did so with help from Russia, Turkey’s historical rival.

Another risk factor is the vague definition of some of the EEZs, which give states special rights of exploration under United Nations maritime law. Portions of the Egyptian and Israeli zones overlap, for example. In March an Egyptian parliamentarian declared that Aphrodite lies within Cairo’s zone; Parliament is now considering a draft law that would redraw the country’s maritime maps accordingly. “If the proposed law passes, tensions in the Eastern Mediterranean arising from this newfound natural resource could further escalate,” warned the Signet Institute, a Cairo-based think tank, in a March bulletin.

Analysts generally discount the risk of a military clash over Aphrodite. By awarding drilling licenses this year to Eni and Total, while retaining Texas-based Noble Energy to explore its reserves, Cyprus shrewdly aligned its interests with those of companies from three member countries of NATO, to which Turkey also belongs. Having ruled out a pipeline to Turkey, however, Nicosia is developing a risky and expensive alternative: a liquefied-natural-gas, or LNG, terminal to process fuel for transport by ship. Such facilities can cost more than $10 billion and take a decade to build. They are also expensive to operate given the amount of energy they consume. Banks are reluctant to finance them without 20-year forward contracts from buyers.

According to estimates by the Peace Research Institute Oslo, the gas in Aphrodite’s block 12, where Noble Energy made its initial strike, would be worth about $50 billion after investment costs if it was liquefied. The institute estimates that the same gas would be worth $69 billion if it was pumped through a pipeline to the port of Ceyhan on Turkey’s southern coast, a regional hub for oil and gas. “An LNG terminal is a massive financial undertaking,” says Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies. “The economy will benefit in that a lot of money will pour into Cyprus and that will generate some jobs, but it certainly won’t solve the country’s problems immediately. Given that quite massive costs will need to be recovered initially, Cypriot LNG may not show profits until after 2020.”

A Cypriot-Turkish pipeline would suit the Europeans better. EU countries, having experienced periodic cutoffs of Russian gas supplies from 2005 to 2009 because of feuding between Russia and Ukraine, have identified Turkey as a vital transit point for fuel. Nicosia, however, insists that a Turkish option is out of the question for both security and diplomatic reasons. Officials cite the occasional times Ankara has shut off gas shipments to Greece as proof that Turkey cannot be relied upon. In addition, says former Cypriot Foreign minister Erato Kozakou-Marcoullis, Cyprus should not reward a country that does not recognize its legitimacy as a sovereign state.

“I’ve said many times that a pipeline could provide the basis for goodwill and negotiations and that it would make a good means of distribution,” says Marcoullis. “But that’s provided the Cyprus issue is resolved.”

Marcoullis says Nicosia will leverage its investment in an LNG terminal by promoting itself as a regional liquefaction hub for neighboring Israel and perhaps Egypt and Lebanon. “We envision maximizing profits through cooperation among these countries in the export of natural gas and oil,” she says. “The Europeans are very interested in this approach, but we also plan to export to Asia.”

The odds against Cyprus’s succeeding at that approach are steep. There is no LNG terminal in the world that processes gas from multiple countries, experts point out. Israel is unlikely to be the first country to entrust a foreign partner with its feedstock. Nor is it clear that Israel, with proven gas reserves of some 34 trillion cubic feet from its Leviathan and Tamar fields, will choose to export at all. Despite the allure of foreign sales, the Jewish state is constrained by the need to ration its reserves against the prospect of a national emergency. Should Israel export its gas, it is likely to avoid long-term contracts that would deplete its resources faster than spot trades or short-term sales agreements, analysts say.

Either way, Israel has the luxury of time to decide which course to choose. “Israel is nowhere near making a decision this year,” says Oxford’s El-Katiri. “And when it does, it will likely take a different approach than Cyprus. In the end, everyone’s on their own.”

Even Noble Energy, which discovered Aphrodite, appears to be wavering in its commitment to Cyprus. After drilling an exploratory well in September 2011, the company declared that a second test well, to firmly establish the scope and quality of the gas, would be drilled in December 2012. When that date passed, Noble Energy said it would finish the job beginning in April. In February the company conceded it would miss that date as well, citing equipment problems. In an April interview with the Cyprus Mail, Noble CEO Charles Davidson said the second test well would “most likely” be drilled in June. Such delays have prompted speculation about the true size of Aphrodite, and about Noble Energy’s desire to develop it. (Phone messages and e-mailed requests for comment by Noble Energy, both to Nicosia and to the company’s Houston headquarters, were not returned.) There are rumors that Noble Energy — which in 1998 discovered Israel’s Leviathan field and which has equity stakes in Israel’s reserves — is stalling for time to find a buyer for its 70 percent share of the drilling rights to Aphrodite. At the moment, energy analysts say, Noble Energy executives are working overtime to persuade the Israelis to green-light gas exports.

“Right now Cyprus’s main assets are controlled by a company that is not prioritizing them, and that is creating some commercial drag,” says Benjamin Gage, an analyst at PFC Energy, a Washington-based energy consulting firm. “If the Cypriot government finds more reserves, maybe it can tempt Noble back to Aphrodite.”

The potential is there. According to the U.S. Geological Survey, the Eastern Mediterranean is estimated to hold 122 trillion cubic feet of undiscovered and technically recoverable natural gas and 1.7 billion barrels of oil. Eni and Total beat out a pack of other bidders eager for licenses to prospect in Cypriot waters. Should they discover a field that is close in size to Aphrodite, the additional capacity would justify the expense of liquefaction.

“Eni and Total came in on the assumption that there will be additional resources,” says Michael Leigh, a senior adviser to the German Marshall Fund of the United States, a nonprofit organization devoted to transatlantic issues. “If Nicosia makes the right decisions, it can be exporting gas by 2019 and generating the kind of high-tech upstream and downstream industries that can promote Cypriot independence from the financial sector.”

But global energy markets may not be willing to wait that long. In February, for example, Israeli media reported that Turkish conglomerate Zorlu Holding, in league with Western multinationals, was lobbying Israel for access to its gas reserves via a pipeline that by some estimates would cost about $2 billion and take about three years to build. Despite strained ties between the two countries, according to Israeli daily Haaretz, Israel was considering Turkey’s appeal “because other options have become less attractive as well, with Greece’s economic crisis worsening and the cost and engineering challenges of LNG proving difficult.”

The Haaretz report appeared several weeks before Turkey — with U.S. President Barack Obama as mediator — accepted an apology from Israeli Prime Minister Benjamin Netanyahu for the Mavi Marmara incident. Since then the Turkish press has been heralding a rapprochement between the two countries, with a Turkey-Israel gas pipeline as its centerpiece. As Taner Yildiz, Turkey’s minister of Energy and Natural Resources, told reporters at an energy conference in April, “The reason for Israel’s apology was not energy projects, but the consequence could be energy projects.”

Such an outlook may be premature. As the German Marshall Fund’s Leigh points out, Netanyahu’s apology was “an important step, but only the first step” in what could be a fitful process of settling such matters as compensation for the families of those killed in the Mavi Marmara incident. Just days before he accepted Netanyahu’s gesture, Turkish Prime Minister Recep Tayyip Erdog˘ an publicly compared Zionism to a “crime against humanity” — hardly the language of reconciliation, notes Leigh. “What has happened so far is too preliminary to change the geopolitical calculus of the Middle East,” he says. “The relationship between Israel and Cyprus will continue. The apology has not changed it.”

Nevertheless, beyond Erdog˘an’s rhetoric lies a thicket of shared interests between Turkey and Israel and the unimpeachable logic of a shared pipeline. In a bid to reduce its dependence on rivals Russia and Iran for imported fuel — Ankara imports some $60 billion of foreign energy supplies each year — Erdog˘an has appealed to Iraq’s northern Kurdish population, which has claims on enormous gas and oil reserves. (Iraqi Kurdistan is also thought to host Israeli army officers who train and advise the Kurds’ Peshmerga militias.)

Cutting an energy deal with Iraq’s semiautonomous Kurdish region would antagonize both Iraq’s Shiite government, which regards any hydrocarbon resources within Iraq’s borders as its own, and Iran, which has developed a politically powerful and commercially lucrative relationship with its Arab neighbor. Anything that pains Tehran — and Iran’s besieged ally, Syria — is welcomed by Israel. Facing a common set of adversaries, Israel and Turkey have strategic as well as economic incentives to turn to each other, at least for the sake of energy security, some analysts say.

“Turkish-Israeli discord is largely for show,” says Metropolitan University Prague’s Belfer. “Erdog˘an has had to burnish his anti-Zionist credibility with moderate Sunni rebels in Syria he wants to guide to power there once the civil war ends. All things being equal, it’s in Israel’s best interest to have a relationship with Turkey rather than Cyprus and the EU.”

Just as Cypriot officials invested an evangelical faith in Aphrodite’s capacity to help their country ride out the debt crisis, so too did they dismiss warnings that a warming of Turkish-Israeli relations would pose a major setback to its energy ambitions. As Strata Insight’s Le Cornu puts it: “If the Israelis decide to cooperate with Turkey over Leviathan, the momentum may prove too difficult for the Greek Cypriots to resist. A Turkish-Israeli pipeline could then become the principal channel for gas exports for the Eastern Med.”

As if there aren’t enough challenges to the viability of Cypriot gas exports, Cyprus also has to reckon with the looming American shale gale, as some are calling the rise in U.S. gas production. According to the U.S. Energy Information Administration, annual production of natural gas grew by nearly 19 percent between 2007 and 2011. Output is expected to rise a further 50 percent by 2040. Economists estimate that hydraulic fracturing, or fracking, a controversial but productive way to release new supplies of oil and gas from shale rock formations, could allow the U.S. to become a net gas exporter by 2020. A government study released in December concluded that gas exports would be a “net economic benefit” to the country. Plans for new LNG terminals that can process fuel for export as well as domestic use are well under way.

What’s good news for America and other presumptive shale-gas giants, energy analysts say, could be ominous for Cyprus. “With the LNG option, as opposed to a pipeline to Turkey, Cyprus risks entering a more competitive market in the future due to the long lead time to complete such a facility,” says Le Cornu. “There have been significant gas discoveries in Mozambique, Iraq may emerge as a major supplier, and there is also the potential downward impact on prices from shale gas.”

Price negotiations between energy distributors and suppliers are already factoring in expectations of a shale-gas boom. Crucially, the industry’s tradition of indexing long-term prices to petroleum rather than the lower LNG spot prices may be changing. According to a study released in March by Peace Research Institute Oslo, Korea Gas Corp. late last year reportedly agreed to buy fuel from a U.S. company at a price based on bids for LNG. The report also cites a July 2012 contract signed by a German energy company and Russian gas giant Gazprom “in which the lower price of LNG spot prices appears to have played a part.” If such a trend continues, cautions Global LNG Monitor, an industry newsletter, some of the more costly LNG projects will not be built.

Similarly, gas deposits that are expensive to develop, such as those deep underwater, may become unattractive to suppliers, industry experts say. According to the PRIO study: “More difficult areas tend to be exploited when prices are high. Thus, if global gas prices come down and this affects the current and future profits of oil and gas companies, there could be less interest in conducting further exploration in the more expensive deep-water areas such as the Eastern Mediterranean.”

SINCE TURKEY’S INVASION OF Cyprus 40 years ago, delegations from both sides of the divide have met more than 50 times to resolve the island’s partition, to no avail. The most recent and promising effort was led by former U.N. secretary general Kofi Annan in the run-up to Cyprus’s entry into the EU. A referendum on a draft agreement held in April 2004 was passed by Turkish Cypriots but turned down by the Greek side. Many officials in Ankara, Turkish Cyprus, New York and Brussels still blame Greek Cypriot leaders for not doing enough to sell the plan to their constituents.

The Turkish minister for EU affairs, calling for a revival of talks to resolve the Cyprus question, pointedly noted in February that “if three out of four Greek Cypriots had not rejected the [U.N.] plan, today the Greek Cypriots wouldn’t have been on the verge of bankruptcy and the EU wouldn’t have had an energy crisis.”

For years Cypriot elites on both sides of the island’s divide have yearned for a foreign intervention — by the U.S., the Russians or the Europeans — to impose a settlement. Ironically, the crippling demands contained in Cyprus’s rescue plan may represent the closest thing to a deus ex machina.

“We hear more talk, positive signals from France and Germany, about how it makes much more sense to transport gas through Turkey,” says Özdil Nami, a Turkish Cypriot and a participant in several negotiating rounds with Nicosia. “The troika can make it clear that a Cyprus-Turkish pipeline can become a catalyst for reconciliation. Besides, the Europeans want cheap gas, and they won’t get it if it comes liquefied.”

Institutional Investor 2013-3-3
As he prepares to negotiate a bailout with top officials of the European Union and the International Monetary Fund, Nicos Anastasiades, Cyprus’s newly elected president, would seem to have a weak hand. The island-state’s small size — population 850,000 — gives it little clout, and its reputation as a shady tax haven for Russian oligarchs is anathema to German politicians, who will ultimately have to underwrite any deal.

Yet Anastasiades has some trump cards of his o n. EU officials are eager to avoid any fresh flare-up of the euro area’s debt crisis after Italy’s inconclusive parliamentary election triggered an abrupt bond market sell-off. And Cyprus is sitting on a massive natural gas field ripe for exploitation, which could bolster Europe’s energy security.

Those factors will be at play when Cyprus’s new finance minister, Michael Sarris, meet s with colleagues from other euro zone countries in Brussels on March 4 to resume negotiations on a bailout, estimated at about €17.5 billion ($22.8 billion). The money is needed to recapitalize the country’s banks, which suffered big losses on their holdings of Greek debt, and to help the government meet its debt obligations. Anastasiades says he wants to sign a deal before May, when the government is expected to run out of money.

“There must be no doubt about this: If Cyprus gets no external help, it will slide into default,” Jörg Asmussen, a board member of the European Central Bank, told the German newspaper Handelsblatt last month. Such a development “would have high financial and political costs,” he added.

The ECB, the European Commission and the International Monetary Fund make up the so-called troika that, since last June, has been negotiating the terms of an assistance package with Nicosia. Cyprus, which joined the EU in 2004 and the euro zone four years later, would be the fifth of the zone’s 17 countries to get a bailout, after Greece, Ireland, Portugal and Spain.

Nicosia has vowed to resist the kind of tax hikes and budget cutbacks that have sparked a backlash throughout much of southern Europe, most recently in Italy, where former prime minister Silvio Berlusconi and the Five Star Movement of comedian Beppe Grillo scored strongly by campaigning against austerity. Still, the country’s euro zone partners are likely to demand greater budget tightening in return for their support, as well as requiring holders of Cyprus’s sovereign debt to take write-downs, just as Greek bondholders did.

The most controversial part of the talks revolves around Cyprus’s outsized financial sector. EU and IMF officials are reportedly considering proposals to impose losses on uninsured depositors in Cyprus banks, something that they did not do in Ireland’s bailout.

Last month Anastasiades told the Financial Times that a haircut for large depositors would be “catastrophic” for Cyprus and could unleash the very contagion on the euro zone that the troika says it wants to avoid.

Cyprus’s banks grew at a feverish pace between 1995 and 2011. The banking sector’s assets currently total nearly eight times the country’s €18 billion gross domestic product, much bigger in relation to the economy than Irish banks, whose problems caused that country’s debt to soar.

The banks had an estimated €5 billion in Greek debt on their books, and they were obliged to write off roughly half of that exposure as part of Greece’s debt restructuring. In addition, the banks have some €22 billion in loan exposure to Greek companies and individuals. The state’s efforts to recapitalize the banks have driven up Cyprus’s public debt to 140 percent of GDP and prompted Standard & Poor’s and Moody’s Investors Service to lower Nicosia’s debt rating to junk status. Today, the Cypriot economy is propped up by Russian investors, who maintain cash deposits in local banks estimated at anywhere between €8 billion and €35 billion, according to a German intelligence report quoted by Der Spiegel magazine. The island’s reputation as a tax haven has attracted money from Russian oligarchs for years.

Among the most prominent and detailed allegations of money laundering in Cyprus were those leveled by the late Sergei Magnitsky, a Moscow-based lawyer for the London-based investment fund Hermitage Capital Management. He claimed that Russian officials laundered an estimated $30 million through Cypriot banks as part of a $230 million tax fraud. Not long after making his charges, Magnitsky was arrested and thrown in jail, where he died in 2009.

The Cypriot foreign minister, Erato Kozakou-Marcoullis, strenuously denies her country is a vortex for shadowy deals. Since Cyprus reached out to the troika, she says, its legislature has passed a raft of reform bills, including vigorous laws and enforcement mechanisms to deter money laundering. “Cyprus has one of the cleanest records as far as money laundering is concerned,” Marcoullis tells Institutional Investor, “not only relating to legislation but enforcement. We have done our homework.”

Yet a viable bailout agreement will most likely require Cyprus to commit to adopting additional anti-money-laundering regulations tough enough to appease hardliners in the Bundestag but not so severe as to offend Moscow, says Eurasia Group’s Rahman.

Germany, which has contributed amply to previous bailout agreements and thus wields considerable influence over their terms, is reluctant to stump up for another package, let alone one that might reward Russian tycoons. Moscow has already extended a €2.5 billion loan to Nicosia. Some EU members, including opposition lawmakers in Berlin, believe Moscow should assume a greater cost of a bailout by easing the terms on Cyprus’s debt.

Last month the Financial Times reported details of a closely held European Commission memo that called for a reduction by half of Cyprus’s bank assets over the next ten years. It recommended that large-scale, uninsured depositors in local banks as well as investors holding Cypriot sovereign bonds bear the brunt of the bailout, and called for an increase in the island’s corporate income tax to 12.5 percent from 10 percent. By forcing depositors and investors to absorb the shock of the rescue package, according to the plan, the EU could reduce its share of the bailout to a mere €5.5 billion. The Cypriot government opposes such measures. Higher taxes would undermine its appeal as a tax haven, it argues, while imposing losses on uninsured depositors might trigger a destabilizing flight of capital.

If a bailout package is agreed to and implemented faithfully, the IMF reckons Cyprus can reduce its debt to a sustainable 100 percent of GDP by 2020. Such an estimate does not, however, account for revenue Nicosia hopes to be generating from its gas field, known as Aphrodite, by 2019.

In a speech in The Hague, Jeroen Dijsselbloem, the Dutch minister who chairs the Eurogroup of euro zone finance ministers, suggested that the Cypriot government deposit the proceeds from future gas sales into an escrow account to be managed by the troika. That idea was quickly dismissed by Neoclis Sylikiotis, Cyprus’s commerce minister, who insisted that the very existence of the natural gas reserves made the country’s current debt burden sustainable and insisted that Nicosia would “take the lead role in managing its wealth.”

Just how much wealth Aphrodite might represent is, at this point at least, a matter of speculation. In December 2011, after drilling an exploratory well, Houston, Texas–based Noble Energy declared that Aphrodite could yield between 5 trillion and 8 trillion cubic feet of natural gas. A second borehole, which would firmly establish the size and quality of the gas, was to be drilled in December. When that deadline passed, Noble Energy announced it would drill in April. Last month the company said it would miss that target date as well, citing equipment problems. A new deadline has yet to be introduced and analysts are cautioning Nicosia against airy assurances that natural gas will deliver Cyprus from fiscal collapse with or without the troika’s help.

“We won’t know for sure how much gas is available until after the second hole has been drilled,” says Hugh Pope, director at the International Crisis Group. “Cyprus is in a dreadful economic state, a tailspin. The Cypriots need a new story and they’ve wrapped themselves in the gas story.”

Of course, a lot could happen before the end of the decade, when Nicosia presumes it will be a regional energy exporter. The American “shale gale” could fizzle and Cyprus, by leveraging its gas reserves with Israel’s, could quickly retire its debt obligations with energy income and emerge in the coming decade stronger than ever. As it is now, however, its geopolitical burden is one of many that obscures its outlook and weakens its hand as it digs in against the troika.

The Majalla 2012-28-12
Mazen Kalab arrives an hour late for his interview with me, a Western journalist. He twitches nervously as he settles into his chair at the café of the hotel in Istanbul where he has been living on and off since August, when he gathered his family and fled his home in the ancient Syrian city of Aleppo.

Kalab is a war refugee and he wears his exile heavily. Two years ago he was part of a family empire within Aleppo’s legendary textile industry. He owned his own factory, employed fifty workers and generated a complex of related work: cotton growing, harvesting, dyeing, and weaving. He says his factory made two hundred thousand dollars a year in revenue, a figure that is no doubt wildly understated.

“Aleppo is a river to the Syrian economy,” Kalab said, “and it has dried up due to the fighting.” The war to depose Syrian dictator Bashar Al-Assad smothered Aleppo in its embrace this year and it has yet to let go. Portions of the city held by rebel forces are occasionally shelled by regime loyalists from the air. Most of the residents have left. First to go were the super-rich, the predatory elites who, since Assad was elevated to power after his father’s death in 2000, helped themselves to vast slices of industries and services. They were followed by the traditional oligarchs, the established merchant class that has dominated the city’s industry for centuries in their discreet, understated manner. The last to leave were the itinerant farmers and tradesmen, the dispossessed who could find nothing left to pick from the rubble.

A diaspora of merchants from Aleppo is accumulating throughout the Middle East. Just as their Mesopotamian brothers fled a sectarian holocaust in Iraq several years ago for cities like Damascus and Amman, so now are Syrians seeking refuge in Turkey, Lebanon, Dubai, and Egypt. They flee the war and the profiteering and they take with them an entrepreneurial instinct honed since Aleppo was a gem in the setting of the Old Silk Road. It is unclear weather they will come back. In an unguarded moment, Kalab declares he will seek “commercial immunity” in the United States—as he sees it, an American passport in return for a sizable direct investment in the country. A US diplomat later confirmed that foreign businessmen can effectively buy citizenship for about USD500,000.

“When I was home I was well known,” Kalab says. “Here I know no one. I’m nothing.” Kalab tells a familiar story: in late summer he was approached by rebels and was asked to contribute five thousand dollars to the revolution. A few weeks later the same group demanded enough money to buy ten Kalashnikov-style assault rifles. Fearful that he or his sons would be kidnapped should he decline the request, Kalab packed his family members into an SUV and drove to Lebanon, where he has family.

Kalab and his uncle spent two months in Cairo and Amman looking for buying opportunities. Finding none, he left for Istanbul to meet with some Turkish traders he knew. “We’ve dealt with the Turks for years in textile exports,” he says. “There is no opportunity like there is here.” Like his fellow exiles, Kalab has a grudging admiration for Turkey, Syria’s historic rival, for being shrewd enough to orient itself toward the more dynamic markets of the West as much as the East. “Turkey is more open to Europe,” he says. “They outsmart us in trade agreements. They take and we give.”

With the help of his Turkish hosts and some old Aleppine partners, Kalab raised enough money to launch a garment factory in a rented apartment in suburban Istanbul. It is now alive with the din of a dozen second-hand sewing machines and fabric cutters manned by Aleppine exiles. Every few days trucks from their old buyers in Iraq, Jordan and Saudi Arabia come to the apartment and collect a load of cheaply made sportswear for working-class consumers back home.

Kalab is unsure of his next move. He is the middling son of a family with five brothers and three sisters. In keeping with Aleppine tradition, each son launched and operated his own company rather than work for the family patriarch, as is so common elsewhere in the Arab world. Aleppines wince at the suggestion that they have been a pillar of the Assad dynasty. In fact, they argue, Aleppo’s enterprises have accommodated the current regime just as they did the Ottomans, Mongols, and Seleucids who preceded it. There is also a deep cultural antipathy among Aleppines for Gamal Abdel Nasser, the Egyptian strongman who in 1957 negotiated the United Arab Republic with his Syrian counterpart. Nasser, so goes the local narrative, nearly destroyed Syrian agriculture and industry with his variants of land reform and nationalism before the Aleppines rallied alongside his enemies to dissolve the union.

“We are independent,” says Kalab, now on his third cigarette, “even among our siblings. “That is the Aleppine way. Each succeeds or fails on his own. Of course we will support family members who fail or get married, but we also compete with each other.” During family reunions, Kalab says, the men always end up in the living room talking business while the women huddle in the kitchen. They discuss output, design, modes of production, new markets—everything, it seems, except income. “Why should we speak openly about something we’d never tell the government?”

Kalab’s factory specialized in athletic wear. Beginning in the late 1990s he sold product to buyers of top European soccer teams, and in 2006 he supplied several World Cup teams with uniforms and fan merchandise. Each year he would travel to Al-Hasakeh province in northeast Syria, where the best cotton grew, to inspect the harvest. Al-Hasakeh gets abundant amounts of rain, Kalab explains. The soil is red and the climate is perfect for cotton. There have been no yields since rebel forces garrisoned the mills. “Both sides in the war are destroying it,” he says. “The regime has bombed the fields.”

The interview is winding down. Kalab has relaxed, but he will not be drawn into politics. If he has ties to a particular faction in the revolt, or if he is loyal to the regime, he is not letting on. He is, true to his Aleppine instincts, all business. “When they find an honorable person to lead Syria we will support him,” Kalab says. “Right now neither side is suitable. We are all reluctant to start all over again.”

International Herald Tribune 2012-19-12
ISTANBUL — Jihad Yazigi concedes that he owes a debt to Bashar al Assad. Without the now-besieged Syrian president, there would have been no free-market reforms, no surge in foreign investment and no modern banks in Syria. As Mr. Yazigi acknowledges, there also would not have been The Syria Report, his weekly economic digest that is one of the country’s few successful independent publications.

“My business thrived because there was an opening and I have to give Bashar credit,” Mr. Yazigi said during a recent conference in Istanbul, when asked to reflect upon the changes that awakened the Syrian middle class even as they enriched the elite. “The problem is he didn’t go deep or fast enough to head off the unrest. He didn’t reform the judicial system or encourage a free press, for example. These were red lines that could not be crossed.”

Mr. Yazigi, the son of an exiled Syrian dissident, publicly called for democratic reform as early as 2004, most notably in a column headlined “The D Word.”

At the same time, he applauded the government for stimulating free trade and foreign investment, liberalizing its currency, reforming its financial sector and removing subsidies on everything from cooking oil to farm equipment.

Largely as a result, the country’s gross domestic product rose steadily; between 2005 and 2010 it achieved an annualized growth rate of about 5 percent, among the highest for developing countries at the time.

Syria was not the only Arab country that aggressively deregulated its economy. Egypt, Tunisia, Jordan and Saudi Arabia all embraced similar changes which, by the end of the decade, had produced impressive growth but also high inflation, stubborn unemployment and yawning rates of income disparity.

Was it free-market reforms that triggered the convulsions that continue to destabilize the region? Or regime kleptocrats who hijacked a badly needed reform process?

“It makes it a lot more difficult for people to sacrifice for the sake of change when elites are profiting,” Mr. Yazigi said. “That said, there were more problems than just corruption.”

In promoting service sectors like hotel construction and management over labor-intensive ones like manufacturing, Mr. Yazigi added, the government neglected a fertile source of jobs. It also exposed its industries to high quality, affordable imported goods when it signed a free trade deal with Turkey.

The government withdrew price supports on farm equipment and produce too quickly, he said, sparking an exodus of laborers from an agriculture sector that once accounted for a quarter of total employment.

“Many farmers ended up moving into urban slums,” Mr. Yazigi said, “and that led to a lot of stress and resentment in the cities.”

Mr. Yazigi, a French citizen and Greek Orthodox Christian, is, like Mr. Assad, an outsider whose destiny lured him back to Syria. Both men are sons of plotters — though unlike Mr. Assad’s father, Hafez, an air force general who ruled Syria from 1970 until his death in 2000, Raja Yazigi was on the losing end of a 1961 coup he helped lead in Lebanon.

After fleeing via Jordan, he settled in Ghana, where he established a carpentry business and started a family. At the age of eight, Mr. Yazigi was sent to France for his education. Like Bashar, who studied ophthalmology in Britain before he was fated by his elder brother’s death to lead the Assad ruling dynasty, Mr. Yazigi was obliged to interrupt his studies at the American University in Paris and run the family business when his father passed away in 1995.

The building trade could never compete with Mr. Yazigi’s love of politics, and with the arrival of Bashar as president he sensed an opportunity to indulge a passion inspired by his father, who sent his children to Damascus every summer to improve their Arabic and learn the city’s political terrain.

In October 2001, from Paris, Mr. Yazigi distributed an online translation of Syria’s then-fledgling financial press. He knew he was onto something just a few weeks later when The World Bank contacted him and asked for more.

“The Internet had just started,” he said. “I felt like this was something I could do that I really loved and give something back to the country.”

The Syria Report comes out each week with data and news gathered from a variety of sources, including Mr. Yazigi’s own reporting. Among his most precious resources is a database of hundreds of Syrian companies he compiled by soliciting such details as contact coordinates, names of board directors, financial returns and shareholder information.

Extracting proprietary information from Syria’s secretive, family-owned businesses was not easy. Over time the database would evolve into a coveted tool for foreign investors and traders converging on Syria. Subscriptions rose in tandem with liberalization and growth.

A one-year membership costs $600. Mr. Yazigi is coy about the number of paying readers, though he allows that sales grew by 30 percent in 2010, a record year for foreign direct investment in Syria, then declined significantly in mid-2011, when peaceful demonstrations against Mr. Assad’s brutality grew into war.

Much of the sales he lost to a diminished foreign business community have been absorbed by interest among academics, journalists and aid workers.

The heart of The Syria Report’s content is provided by the Syrian government, which despite the war still faithfully posts official economic data and tender offers. Between the stories about corporate earnings and the depreciating Syrian pound one can find the occasional reporting that is usually absent Syria’s state-controlled press.

The government kicked out the country’s few accredited foreign correspondents not long after the violence began. Stories about multinationals quitting war-torn Syria, for example, or the simultaneous closings of several embassies, are rarely carried anywhere but in The Syria Report.

“Jihad has been very engaged and bold,” said Peter Harling, a Syria specialist for the Brussels-based International Crisis Group. “He’s taking principled but sophisticated positions just as other Syrians are becoming politically aware and acute in their analyses. This is what gives me hope for the future of Syria.”

Although Mr. Yazigi has blogged critically about the Assad government, his commentary in an English-language online economic bulletin is too esoteric to attract the attention of the state’s security apparatus. His recent decision to move to Beirut, he says, had more to do with the perils of war than government spies. He still maintains an office and a staffer in Damascus to assemble data.

In March 2011, when the regime responded to a first wave of protests by increasing public-servant pay, Mr. Yazigi scolded the government for political “gifts” that would impose “a severe drain on the Treasury and create serious inflationary risks.” In October that year, he disparaged as “nonsense” the government’s decision to ban imports to conserve foreign currency only to reverse its ruling in the face of opposition from the Aleppo business community.

The episode confirmed the government “had no clear economic policy,” Mr. Yazigi wrote, and signaled a reversal of its commitment to free-market reform.

One day, when peace is restored to Syria, Mr. Yazigi said, he would like to expand his existing consulting work. Before the war he applied for a license to host business conferences but was told, in effect, that others close to the government had a lock on the business. It was the kind of red line, he said, that ended up ensnaring the regime.

International Herald Tribune 2012-12-12
NICOSIA, CYPRUS — In October, the government of Cyprus announced it was negotiating possible licensing deals with 15 companies to explore for natural gas in a deep-water zone off the island’s southwest coast. The government says it expects to sign four contracts early next year — raising deep concerns over the possible reaction of Turkey, which has never recognized the Republic of Cyprus or its maritime borders since the de facto division of the island in 1974.

“Turkey says it will not tolerate exploration and Cyprus says it will proceed,” said Hubert Faustmann, an associate professor at the University of Nicosia. “Neither side has blinked and they’re playing for great stakes.”

Aphrodite, as the gas field is named, was discovered a year ago, about 35 kilometers, or 20 miles, west of the Leviathan field, itself discovered a year earlier in Israeli waters. According to an initial survey conducted by Noble Energy, based in Houston, Texas, it could contain 5 trillion to 8 trillion cubic feet of gas, or 142 billion to 227 billion cubic meters, more than Cyprus could consume in a century.

In the initial discovery euphoria, there were suggestions that the development of the Eastern Mediterranean fields could help to stabilize one of the world’s most politically troubled regions.

Political and energy analysts suggested that cooperation between Cyprus and Turkey on gas transportation, and revenue sharing between Greek and Turkish Cypriots, could help to revive stalled Cypriot reunification talks. Gas exports could also help revive a Cyprus economy pummeled by the euro crisis and help Europe to reduce its dependence on Russian-controlled gas. And regional cooperation could help to diminish tensions between Israel and its neighbors.

A year on, the mood has changed. Nicosia, by embarking on a unilateral exploration program, has antagonized both Turkish Cypriots and the Turkish government of Prime Minister Recep Tayyip Erdogan. Ankara, in turn has warned that it would respond forcefully to continued drilling unless the “inherent and equal rights” of the Turkish Cypriots to hydrocarbon finds are respected, said Mithat Rende, a senior Turkish foreign ministry official, in an interview last month.

Turkey also claims that portions of the exclusive economic zone established by Nicosia in 2010 as part of its gas exploration program lie within Turkey’s continental shelf.

Last month, at an international energy conference in Istanbul, Turkey reiterated warnings that the world’s major energy companies would lose access to its vast market should they work with Nicosia on Aphrodite. Companies currently negotiating possible deals with Cyprus include Total of France, Eni of Italy and Novatek of Russia.

In a similarly pointed warning, in May, Turkish fighter jets chased Israeli warplanes from what Ankara said was Turkish airspace just north of Cyprus. The chilling of formerly cordial relations between Turkey and Israel reflects not only the standoff over Israel’s blockade of Gaza but also close Israeli cooperation with Nicosia on exploration of Cypriot gas reserves.

According to a report from the International Crisis Group, citing local news reports, tensions are continuing to rise, with Greek Cypriots accusing Turkey of increasingly provocative military maneuvers and “gunboat diplomacy.”

“We cannot rely on either side of Cyprus to show leadership on this issue,” says Ozdil Nami, a member of the Turkish Cypriot Parliament and a former chief of negotiations for reunification. “We need the U.S., Russia and others to take a stance. Otherwise this area will present itself with another conflict in a region where we don’t need another one.”

Since it could take at least seven years to deliver Aphrodite gas to market, some observers say interested parties have plenty of time to unravel their thicket of disputes. Most agree, however, that reconciliation over the field is unlikely without progress on Cypriot reunification, the prospects for which are dim.

There are also market forces to consider. As sources of natural gas proliferate, the price may decline even as Europe revives economically. Energy analysts say U.S. shale gas in particular, which now accounts for 35 percent of U.S. natural gas consumption compared with just 1 percent in 2000, is a global game changer.

One obvious way to leverage a price advantage from Aphrodite gas would be to transport it in the most cost-efficient way, which by all accounts means pumping it through a pipeline from Cyprus to Turkey, where it could be shipped to Europe. That would suit the Europeans who, having been denied gas supplies in late 2006 as a consequence of feuding between Russia and Ukraine, identified Turkey as a vital transit point for fuel.

In addition to the cost benefits, some analysts say, a Cyprus-Turkey pipeline would be just the tonic needed to stir reunification talks, or as Laura Le Cornu, an energy consultant based in Cyprus, puts it, “the mother of all confidence-building measures.”

For many Greek Cypriots, however, to say nothing of Israelis, such faith in Turkish good will is dangerously naïve. Not only has Russia been known to turn off its gas taps to settle geopolitical scores, Egypt in April briefly interrupted Israeli and Jordanian supplies and Turkey has done the same to Greece over the last several years. Given such exigencies, says Andreas Theophanous, a professor at the University of Nicosia, “Why would you accommodate a country that does not recognize your right to exist?”

That leaves only two alternatives: pumping the gas via pipeline from Greek Cyprus to the Greek island of Crete and then on to Europe, or building a liquefied natural gas terminal and transporting the fuel by sea. Both options are expensive; L.N.G. terminals typically cost about $10 billion, or about 10 times the estimated $1 billion price of a Cyprus-Turkey pipeline.

A pipeline linking Cyprus to Crete would cost even more. Harry Sachinis, chief executive of the publicly controlled Greek firm, Public Gas Corp., which is known by its acronym Depa, says that a study by the pipeline contractor J.P. Kenny has shown the feasibility of such a project: “If a decision were made today,” he said, “it could mean gas to Europe by 2018.”

Still, at some 1,150 kilometers in total pipeline length, a Cyprus-Crete link would be comparable in scale to the Nord Stream system that brings Russian gas to Western Europe under the Baltic Sea and could cost as much as $17 billion to build, according to Strata Insight, a hydrocarbons consulting firm in Nicosia.

Such is the burden of politics, says Praxoula Antoniadou Kyriacou, a former Cypriot gas minister and now a leader of the country’s liberal United Democrats party. “To the extent this problem is unresolved and there is no pipeline through Turkey, that leaves us with more expensive alternatives” she said. “We have no choice but to consider political and economic factors.”

Turkey is also running out of options. The strong international response to Nicosia’s tender has challenged Ankara on its threat to punish companies that entered the bidding process.

“Cyprus has done a good job of converting licenses into support from big countries,” said Mr. Haustmann of the University of Nicosia. “The Turks cannot take on France, Italy, the U.S. — and Israel.”

Hugh Pope, a director at International Crisis Group, said that “everyone could win” if relations were normalized. “But a failure to strike a political compromise has held Turkey back for decades: Now it’s blocking Nicosia’s most obvious route back to prosperity.”

International Herald Tribune 2012-12-5
ISTANBUL — In an unheated apartment in Istanbul, Mohammed Sahsoun, a businessman who fled the fighting in Syria, has set up a tiny garment factory. Here, on a chilly day, Mr. Sahsoun and the other proprietors of the shop welcomed a 32-year-old exiled trader from Aleppo with cigarettes and cups of sweet tea.

The guest is a former supplier. When Syria was at peace, his family sold Mr. Sahsoun and other garment makers denim fabric imported from China. At its peak, it was a $7.5 million-a-year business that now has been all but wiped out by the fighting.

“The war will go on for 10 years at least,” said Mr. Sahsoun. “We hate violence and we hate the two sides who are creating it in equal measure.”

Only a half-decade after Iraqi businessmen fled civil war in their country, a second exodus is depleting another stronghold of Mesopotamian enterprise. Aleppo, Syria’s largest city and a key hub on the old Silk Road, is the country’s industrial and commercial turbine.

It is home to three million people and 30,000 industrial sites, from textile mills and pharmaceutical factories to small businesses, and it accounts for more than a third of Syria’s industrial output.

Those numbers were valid, of course, before the war to depose President Bashar al-Assad ensnared a city known — wrongly, many contend — as a pillar of the regime.

Today, Aleppo’s factories are operating at a fraction of their peacetime capacity and their owners have gone along with their fortunes. They may return once the killing stops, as many Iraqis have done or, like previous generations of Levantine refugees, they may settle down with their riches far away.

“You cannot separate politics from economics,” said Mr. Sahsoun. “We were harassed by the regime. Policemen would extort us. Cronies of the government would crowd us out of the best deals. But we endured until the war reached our homes.”

Aleppo’s rich industrialists, at once respected and resented for their wealth, acumen and association with the ruling dynasty established four decades ago by Bashar’s father, Hafez, have long been regarded as a unique species of Syrian.

The city’s centuries-old souk, much of which has become a casualty of the war, is in many ways the still-beating heart of commerce thanks to the resourcefulness of its merchant class.

Ancient Greeks developed Aleppo for its proximity to the Mediterranean to the west and the land bridge linking the Hellenic world to the spice markets and silk weavers of Asia. It served as the Ottoman Empire’s industrial belt just as Damascus, with its gold reserves that backed the imperial coin, was its financial center. Like so many other Arab city-states in the Ottoman era, Aleppo was a thriving complex of different religions, ethnicities and tribes.

As late as the early 1980s, when Syria’s per-capita gross domestic product was higher than Turkey’s and on par with South Korea’s, Aleppan textiles were prized among the clothiers and fashion houses of Europe for their quality and affordability.

Back then, Aleppo’s industry was dominated by a handful of large families. Their patriarchs predated the Assad dynasty, which they quietly accommodated just as their forebears did the Ottomans, Mongols and Seleucids.

Since the elevation of Bashar al-Assad as president after his father’s death in 2000, however, their authority has diminished. Over the last decade, a cabal of regime hangers-on have staked their claim to the city’s economy at the expense of established oligarchs as well as cottage industrialists.

Mr. Sahsoun knows well the intrusive reach of Aleppo’s nouveaux riches. A few years ago he wanted to expand his business portfolio by importing medical equipment. A well-connected colleague advised him against such a move as a friend of the Assad family wanted to monopolize the sector.

Undaunted, he applied for an import license only to be denied it for lacking the proper paperwork that was never clearly defined.

“The regime created a whole class of super-rich businessmen,” said Waleed Fakhouri, an Aleppan who remains active in the Syrian resistance even as he lies low in Istanbul. “They include members of Parliament and the relatives of powerful clerics. And once the fighting reached Aleppo they all fled for Dubai and Cairo.”

Those who remained did so at their peril. Either the regime squeezed them to help cover the costs of war or the rebels, desperate for resources and angered at the income disparity that widened in tandem with economic liberalization, targeted them for ransom.

At the current rate of exchange, a kidnapped Aleppo merchant can fetch the equivalent of tens of thousands of dollars. A prominent businessman, Mohammed Maher al Malah, for example, was recently released only after his captors were paid 5 million Syrian pounds, or about $70,000.

Factories have been burned and small-scale business owners have been murdered for not respecting rebel calls for a general strike. Reprisal killings are becoming routine.

“The situation in Syria is so confusing,” said Mazen Kelab, one of Mr. Sahsoun’s business partners. “There is regime terrorism on one side and extremist terrorism from the Islamists on the other. We can’t go back now. If we did we’d face death. Today it is your neighborhood that gets destroyed. Tomorrow it is mine.”

The trader visiting Mr. Sahsoun described his troubles in Aleppo with a group of guerrilla fighters. “They demanded a million Syrian pounds from me and I refused,” he said. “So they threatened to kill me and now I’m here.

“This is the way of Aleppo today. Rich businessmen are kidnapped and held for ransom. The rebels say it’s to raise money to buy weapons. Sometimes that’s true and sometimes it’s not.”

Prior to the rebels’ summer assault on loyalist-held Aleppo, Mr. Sahsoun, 52, employed nearly 200 workers in a garment factory he opened 26 years earlier with $12,000 in seed money. In a good year he had revenue of more than $1 million, with a profit margin of 20 percent.

After a free-trade agreement with Turkey failed to give Syrian producers access to European markets, Mr. Sahsoun refocused on buyers in Jordan, Iraq and Saudi Arabia. Between 2004 and 2008 he enjoyed record sales.

In July, when fighting broke out in his neighborhood in Aleppo’s old city, he and his family fled “with only some cash and the clothes on our backs.”

Within a few months, Mr. Sahsoun had raised about $100,000 in working capital from buyers, enough to rent an apartment in Istanbul’s Merkez Efendi district and buy nine second-hand sewing machines and an industrial fabric cutter. The factory employs eight workers, all exiles from Aleppo, and produces children’s garments.

The factory has no name, but buyers know the address. Every few days they send trucks to pick up a shipment of clothes and deliver them to shops and bazaars in Amman, Baghdad and Riyadh.

“Ultimately, we want to recreate here what we built in Aleppo,” Mr. Sahsoun said. “If we fail we’ll move to Europe or the U.S. I’ve worked in a factory all my life. What else would I do?”

International Herald Tribune 2012-6-27
FAYOUM, EGYPT — Even as the struggle for control of Egypt’s future has played out in Cairo between the military power brokers and the Muslim Brotherhood, a parallel struggle has been playing out in the farm belt between dispossessed peasants and cronies of the old regime.

How each ends may be determined by the other.

Under the military dictatorship of former President Hosni Mubarak, farmers say, many small-scale growers were forcibly evicted by government security forces so that political elites could settle or develop their land. Since Mr. Mubarak’s ouster they have been fighting through the courts to get it back.

The land wars pitch members of the old guard’s inner circle against the Brotherhood’s grass-roots supporters. The outcome of this fight may show who really pulls the strings in post-revolutionary Egypt.

Khamis Abdel Khaled recalls the day in October 1997 when he and about 50 other residents of Fayoum, an ancient oasis in the Western desert, were rounded up and driven to the local police precinct. They were held there and beaten for three days without food or water, he said during an interview this month.

“They even kicked the women,” said Mr. Abdel Khaled. “They told us the land was not ours but ‘gifts to the Wali family from the state.’ We had to bribe a junior officer to use the bathroom.”

Youssef Wali was the minister of agriculture for two decades under Mr. Mubarak, who routinely gave huge tracts of land to loyal judges, generals and ministers.

Driven from 400 feddans, or about 415 acres, the Fayoum growers spent the next 14 years as itinerant laborers or public-sector workers in Cairo.

After Mr. Mubarak was ousted last year they resettled the land, but are now in a legal battle with the family of Mr. Wali, who recently was sentenced to 10 years in prison on corruption charges arising from his time as a minister.

The land feud in Fayoum, 130 kilometers, or 80 miles, southwest of Cairo, is part of an escalating war for control of Egypt’s most precious resources: arable land and fresh water. In 2010, according to data compiled by Sons of the Soil Land Center, a nonprofit organization in Cairo, 270 people were killed resisting dispossession, up from 197 in 2009.

Rural Egypt provided much of the support for Mohamed Morsi, the Muslim Brotherhood’s victorious presidential candidate, and the group’s campaign manifestos were accordingly sympathetic to the plight of small farmers.

“Hosni Mubarak killed Egyptian agriculture over a 30-year period,” said Mohamed Gouda, a Brotherhood economist and a member of Mr. Morsi’s planning committee. “He did it with the help of people like Youssef Wali.”

The Agriculture Ministry did not respond to requests for comment, and attempts to reach Mr. Wali’s lawyer by telephone were unsuccessful.

Lawlessness in the countryside, where nearly 60 percent of Egyptians live, is one of the most malign symptoms of an industry in disarray. While agriculture accounts for 13 percent of the country’s gross domestic product and nearly a third of employment, it is perhaps the most neglected sector in the troubled post-revolutionary economy.

Among the many constituencies vying for Mr. Morsi’s attention, tenant growers have a compelling claim. “The farmers have feared the government for decades,” said Mahmoud al Mansy, who heads Sons of the Soil’s human rights center. “The banks are controlled by the landholders and any gathering of farmers is attacked by thugs. Finally, they are beginning to organize.”

Once the breadbasket of the Roman Empire, Egypt over the past several decades has become heavily reliant on imports to meet its nutritional needs. Estimates go as high as 80 percent, though the data are unreliable. Economists and farm experts attribute the shortfall to rapid population growth and poor dietary habits as well as corruption, bad management and a controversial policy, led by Mr. Wali in the late 1980s, to encourage the development and export of high-value-added products like fruit and flowers at the expense of lower-margin crops like wheat.

Egypt is not the only country in the Middle East that relies on foreign sources for a growing share of its food. Along with North Africa, the region depends more on imported produce and grains than any other part of the world. The situation is especially acute in Egypt, where food prices rose 37 percent from 2008 to 2010. “Bread, Dignity and Social Justice,” the clarion call of the revolt last year, is noteworthy not only for its elements but for the order in which they are ranked.

A number of various agencies, from ministries to chambers of commerce, compete for influence over dwindling resources. Seeds and fertilizers are distributed by a government-owned cooperative and credit is allocated through a state-owned bank — at usurious rates of interest, farmers say.

Despite government lip service to free-market policies, growers say, it is largely Cairo that determines which crops they will produce, where they will grow them, and what their land is worth.

“Egypt suffers from a disconnect between farmers and the government,” says Ray Bush, a professor at the University of Leeds, in Britain, who specializes in Egyptian agriculture. “Policy makers cannot account for how many farmers there are and what is produced within a range of plus or minus 30 percent. They don’t know what’s going on.”

Even large-scale growers are frustrated. The Wadi Group, a local agribusiness giant, operates 5,000 feddans of land, employs 4,500 people and exports much of its output in an economy that, since the revolution, has been running short of hard currency. Yet recently, when the group decided to purchase desert land with brackish well water because of the scarcity of available estates in the more fertile Nile Delta, the government charged it 20,000 Egyptian pounds per feddan, or about $3,180 per acre, while refusing to support that investment by providing irrigation systems.

Such an investment, said Khalil Nasrallah, a Wadi Group partner, can be recovered only by selling into the lucrative European markets. Yet accessing those markets has been made harder since the post-Mubarak interim government suppressed a modest subsidy for exports to the European Union.

“Since the revolution, there’s been no clear direction from the government,” Mr. Nasrallah said. “There is a great mistrust between the private sector and the government.”

Promoting agricultural export revenue was a signature policy of Mr. Wali, who, some growers say, was encouraged in that direction by Washington through the United States Agency for International Development. The policy intensified Egypt’s reliance on imported staples, these farmers claim, by encouraging large producers to switch from their traditional cotton and grain crops to the higher-margin specialties like bananas and cut flowers.

“U.S.A.I.D. played the principal role in these ideas,” said Habib Ayeb, a geographer and professor at the American University in Cairo. “It is their way of thinking, to give money to agribusiness while refusing to give to small farmers.”

A U.S.A.I.D. official disputed this. “We don’t make decisions for farmers about what products they should grow,” he said. “We certainly don’t encourage them to bet the farm on flowers.”

Another legacy of the Wali years is legislation, signed in 1992, that allowed former landlords to reclaim property appropriated in the 1960s by the then-Egyptian strongman Gamal Abdel Nasser.

Law 96, as it is known, invalidated the transfer of land in perpetuity from the original owners to tenant farmers, who after 30 years of paying property taxes had become eligible to own the plots outright. Almost overnight, the government restored an earlier era in which tenant farmers were indentured to a handful of aristocrats who controlled the country’s most fertile land.

Immediately after Law 96 was passed, rents tripled. According to Karam Saber, director of the Land Center for Human Rights, a nonprofit organization that represents aggrieved farmers, the Agriculture Ministry became a clearing house for counterfeit documents that conferred to the bearer ownership of farmland that more often than not would be razed to make room for a property development. In other cases, he says, farms were sold in secret auctions by the ministry as well as the state’s charitable trust. In the two decades since Law 96 was signed, 10 percent of Egyptians lost their farms.

“What the government did was change tenure for all kinds of farming,” Mr. Price said. “The consequences of this to rural employment were huge.”

This month, more than 100 Fayoum farmers demonstrated in front of the Justice Ministry in Cairo against a guilty verdict rendered against one of their own for refusing to concede his farm to a nephew of Mr. Wali. By the standards of Egypt’s once-passive tenant growers, it was an impressive display of unity and resolve. Since the revolution, according to Mr. Saber, some 35 growers’ unions have been established.

“They’re fighting the government, and they’re starting from scratch,” Mr. Saber said. “No one is helping them, and they have nothing to lose.”

Institutional Investor 2012-6-22
With his country in crisis, Mahmoud Abdel Latif — Egyptian banker, turnaround artist and patron saint to an economy of small, credit-starved business owners ­— is nurturing a revolution of his own.

Early this month, he launched a counteroffer for troubled EFG-Hermes, the Cairo-based investment bank that announced in the spring it was selling its rump assets to a small Qatari investor called Qinvest. Under the terms of the deal, EFG-Hermes would merge its investment banking, fund management and brokerage operations with Qinvest for $250 million, a sum Abdel Latif says grossly undervalues the only full-service, regional investment bank in the Middle East. But against a backdrop of fresh political turmoil, the counteroffer may go by the boards.

“The Qataris cherry picked the best assets in the company, and they did it cheaply,” he said. “The EFG-Hermes managing directors secured an exit. It’s like the father sacrificing the mother and the child to save himself.”

The proposed merger, which has been approved by shareholders but is still under review by regulators, is widely regarded as a byproduct of the revolution a year ago that toppled Egyptian dictator Hosni Mubarak and undercut those associated with him and his family. In addition to collapsed deal flow, EFG-Hermes’ co-chairmen stand accused by prosecutors of making illegal profits along with Hosni Mubarak’s jailed youngest son. Rumors abound that one of the firm’s two chairmen is prohibited from leaving the country, and there are doubts that its most valued executives will pack up and leave Cairo for Qinvest’s headquarters in upstart, dull Doha. “No one appears to be leading the company and morale is low,” says an investment banker in Cairo who requested anonymity. “The way things are going they’ll lose some of their best people, and given the market it will be hard to replace them.”

EFG-Hermes declined repeated interview requests for this story. In June, company executives told The New York Times that the capital available to Qinvest ­— its chairman is Sheik Hamad bin Jassim al Thani, a member of the royal family and a son of the emirate’s prime minister — would greatly expand the firm’s capacity for new deals.

On the contrary, argues Abdel Latif, who most recently primed one of Egypt’s largest state-owned banks for divestment — to date the country’s only successful bank privatization. Qinvest, he said, would scoop up EFG-Hermes’ prime divisions at a time when the wave of corporate activity in the Middle East has crested, leaving behind little more than a back office in Cairo.

In the chaotic aftermath of Egypt’s presidential elections last week amid suspicion that the military is imposing a kind of slow-motion coup, Abdel Latif and his supporters have all but withdrawn their offer for EFG-Hermes. According to Abdel Latif, they would have kept the firm whole and paid shareholders a cash premium to the market price of about 25 percent. They also commissioned a post-acquisition plan for a market that is struggling to survive what could be a generation of political change. Regardless of what happens to EFG-Hermes, he says, the big deals are done and it is time, once and for all, for Egyptian banks to confront the country’s vast, undercapitalized and untapped universe of small and mid-sized companies.

“I get calls every day from old clients begging me for help because the big players are not interested in them,” Abdel Latif says. “The banks are playing a negative role in the crisis.”

It is a common gripe in Egypt. The revolt that vanquished Mubarak was preceded by a generation of high unemployment and yawning income disparity that followed an aggressive economic reform drive. Many economists insist that the banking sector bears some responsibility for the instability by not lending enough money to the small-scale businesses that account for an estimated eighty percent of Egyptian gross domestic product. “Banks have a role to play in coaching small clients,” concedes Hisham Ezz Al-Arab, chairman of Commercial International Bank Egypt SAE. “We need to grow these firms from within the banks. This is crucial, but you cannot do it overnight.”

Though Egyptian banks have modernized considerably over the last decade — consolidating their ranks, retiring nonperforming loans and tightening reserve requirement in line with global standards — they are still reluctant to enter the low-margin end of the market. According to a report to be published soon by Cairo’s Egyptian Center for Economic Studies, credit allocated by Egyptian banks for new investment accounts for a mere 3.5 percent of the total, compared with an average 12.8 percent for the Middle East-North Africa (MENA) region. Only 4.2 percent of those loans is held by small or mid-scale businesses. Just over half of private-sector bank credit in Egypt is held by 0.19 percent of bank clients, according to the ECES.

Prior to the revolution, Egyptian banks were rolling in cash. Though only 10 percent of Egyptians are estimated to have bank accounts, deposits as a percentage of gross domestic product stand at a relatively high 100 percent. Yet the country’s loan-to-deposit ratio, at 54 percent, is well below the global and MENA averages of 86 percent and 71 percent respectively. Nearly two thirds of domestic credit is committed not to corporations or small businesses but to Egyptian sovereign debt, much of which was shouldered by local banks when foreigners liquidated their holdings after Mubarak’s removal.

With yields of about 16 percent, bankers have been much more inclined to let those positions ride than begin the spadework of developing relations with small family run businesses. As Egypt lurches from one political storm to the next, however, it is not at all clear how sustainable that carry trade might be. That leaves for exploration the small-scale end of the economy, which Abdel Latif knows as well as anyone. A little over a decade ago, he was tasked by the Egyptian government to overhaul Banque du Caire, one of the country’s largest and most troubled lenders. In an effort to diversify the bank’s loan portfolio, nearly 40 percent of which was held by 15 borrowers, Abdel Latif promoted tiny loans to small businesses at a time when microcredit was alien to most of the Arab world. Over the next twelve months, he built up a sizable client base of family-owned enterprises, many of which operated from stalls in debris-strewn neighborhoods.

In 2002, the government asked Abdel Latif to prepare another lender, Bank of Alexandria, for privatization. At the time, Egypt’s state-owned banking sector was dominated by musty, ultra-conservative institutions that would reject any loan application that did not offer hard assets as collateral. Personal loans, let alone mortgages, were unheard of, and most of the big banks lumbered under the weight of nonperforming loans assumed during the command-economy era of former strongman Gamal Abdel Nasser.

At Bank of Alexandria, Abdel Latif promoted retail lending alongside a pilot mortgage program. He trained his staff to lend to businesses against cash flow rather than hard assets, which meant entrepreneurs might obtain credit on the strength of a good business model or a successful brand rather than put up their homes as security. He created a task force to find promising small businesses and “make them bankable” with better accounting and invoicing systems. He scoured the membership rolls of chambers of commerce for potential clients and he surveyed his larger customers for the names of promising suppliers.

By 2006, when Bank of Alexandria was sold to Italy’s Sanpaolo IMI for $1.6 billion, its small-loan portfolio had risen from zero to nearly 300 million Egyptian pounds allocated to 80,000 clients — a tiny fraction of the bank’s total asset base of 6 billion EP but proof that the country’s gray economy can be profitably harnessed.

“If you have the know-how, you can work through the problems of small business owners and create groups of borrowers within their community,” says Abdel Latif. “It’s all about scale and leverage.” It may be too bad for Egypt that he might not have a fresh chance to demonstrate that via EFG-Hermes.

International Herald Tribune 2012-6-13
CAIRO — Depending on whom you talk to, Egyptian bankers deserve either garlands for the prudential way they avoided financial catastrophe or thorns for throttling their country’s small businesses with miserly, short-sighted credit policies.

Since the revolution that ousted President Hosni Mubarak in February 2011, Egyptian banks have faced a currency crisis, a surge in delinquencies and a flight of foreign capital that left them choking on their own government’s debt. They have survived intact, however, thanks to changes over the past decade that revived the country’s sedentary financial sector.

“The country is still functioning, and it’s largely because of the banking sector,” said Hisham Ezz Al-Arab, chairman of the Commercial International Bank headquartered in Cairo. “So let’s give credit to the market regulators and the players.”

Having purged much of their balance sheets of nonperforming loans, the legacies of Egypt’s command economics of a half-century ago, Egyptian lenders have much about which to boast. The industry’s 39 institutions — dwindled from 62 over the past decade — enjoyed double-digit annual profit growth from 2004 until the advent of the global financial crisis four years later.

In the past 10 years, banks have trained their loan officers to lend against future earnings rather than fixed assets. Theoretically at least, that cultural shift means that an entrepreneur with a smart business plan or a popularly branded product might qualify for credit without having to put up an asset — like his home, for example — as collateral.

Regulators closely monitor provisions against bad loans, and the industry is in the process of adopting the standards laid down by the Basel Committee on Banking Supervision, known as Basel II.

While bankers in Europe loaded up on bundled mortgages and other toxic derivatives, their Egyptian counterparts confined themselves to uncomplicated, mostly locally denominated, debt. In a May report, Standard & Poor’s applauded Egyptian lenders for their “plain-vanilla commercial banking products and services” that spared Egypt the ruinous asset bubbles that have derailed economies across on the European side of the Mediterranean.

Reaping the benefits of that prudence, a bank — the Egyptian subsidiary of the Greek-owned Piraeus Bank, formerly Egyptian Commercial Bank before it was purchased by Piraeus in 2005 — has emerged as one of the few properties in post-Mubarak Egypt to attract foreign investors.

Standard Chartered Bank was in advanced talks to acquire Piraeus bank Egypt, before backing away in November because of Egypt’s bleak economic outlook. Despite Standard Chartered’s retreat, rumors persist that a Moroccan bank — possibly Attijariwafa Bank, the largest in Morocco — could be interested in a bid for the Egyptian lender.

Redemption through restraint, however, has a downside.

According to many economists and analysts, risk-averse bankers in Egypt were unwitting contributors to the job insecurity that helped spark the insurrection last year. By favoring large corporate clients with inexpensive loans while ignoring small-scale businesses, they denied credit to what should be the turbine of Egypt’s highly decentralized economy just as privatization and reduced import duties were fueling inflation and killing jobs.

Though Egypt’s commercial bankers today may be more inclined than those of an earlier generation to take cash flow into account as a metric of credit worthiness, they remain as reluctant as most of their peers around the world to enter the low-margin world of small-bore lending.

As Egyptians prepare for the decisive round this month of the country’s first free presidential elections, it is unclear what, if anything, the two remaining candidates plan to do about the banks.

“Banks contributed to the revolutionary environment by deliberately avoiding smaller companies for the corporations,” said Magda E. Kandil, executive director of the Egyptian Center for Economic Studies. “There was a lot of growth, but the wealth did not trickle down,” she said.

Chronic illiquidity among small to midsize enterprises is common throughout the Arab world. Although countries like Jordan, Saudi Arabia and Syria have followed Egypt’s example and liberalized their financial industries, the primary medium for Arab commerce is still cash.

The problem is particularly acute in Egypt. According to the economist Tarek El Ghamrawy, working from a World Bank study, credit allocated by Egyptian banks for new investment accounts for a mere 3.5 percent of the total, compared with an average 12.8 percent for the Middle East-North Africa region.

Only 4.2 percent of those loans are held by small or midsize businesses. More than half of credit extended to the private sector goes to 0.19 percent of bank clients.

Prior to the revolution, Egyptian banks were awash in cash. Although only 1 in 10 adult Egyptians has a bank account, according to bankers and economists in Cairo, the total of deposits is equal to a year’s gross domestic product, a high ratio by international standards. Yet the country’s loan-to-deposit ratio, at 54 percent, is well below both the global and the Middle East and North Africa regional averages of 86 percent and 71 percent, respectively, according to data from the Egyptian central bank and World Development Bank indicators, Mr. Ghamrawy said.

Starved of capital, all but a small fraction of Egyptian business owners mine a vast, unregulated shadow market. Estimated by some economists at anywhere between 10 percent and a quarter of official G.D.P., the shadow market is a huge source of lost public revenue, and host to endemic money-laundering schemes.

“Egyptian banks need to be more aggressive in the underground economy,” said Angus Blair, president of Signet Institute, a research institution in Cairo that specializes in business and politics in the Arab world. “They have to change their business model and decide what kind of banks they want to be.”

To be fair, Egypt’s liquidity crunch extends beyond small businesses. Since the revolt, a large share of bank capital has been locked up in Egyptian sovereign debt, an obligation imposed on local lenders when foreigners, rattled by the prospect of political unrest after the ouster of Mr. Mubarak, liquidated their holdings in government treasuries.

Nearly two-thirds of domestic credit is now committed to public debt, and while banks are happy to let their positions ride so long as they continue to reap yields of 16 percent, they do so at the cost of rationing badly needed investment capital for their best customers.

The practice also renders them vulnerable to a government default. The same Standard & Poor’s report that praised Egyptian banks for resisting exotic securities also downgraded four of them because of their overexposure to government treasuries “at a time when Egypt’s credit worthiness has deteriorated markedly.”

Bankers and financiers agree that underwriting small and midsize businesses, which account for an estimated 80 percent of Egypt’s private-sector employment, would be a market worth tapping.

Mr. Arab of Commercial International Bank, for example, says that he hopes to reduce the bank’s reliance on institutional clients to 60 percent of its loan portfolio from 80 percent by 2016, with the balance allocated to households and consumers as well as small business owners. “We want to build a risk model that allows for delinquencies but hedges small borrowers against the problems they face,” he said.

What banks can do for small-scale businesses, particularly merchants who routinely work with their suppliers on credit, is less loans for investment or trade finance than overdraft facilities to match their assets and liabilities. Such low-margin services may be worth marketing, banks say, if the client is likely to expand and, ultimately, take his company public.

Because few enterprises in the shadow market rarely survive more than a few generations of family ownership, however, lenders are reluctant to invest the time and resources needed to nurture an enduring banker-client relationship.

Even among those that succeed, said Andrew Long, chief executive of HSBC Bank Egypt, “there’s not much in the way of market depth or brand recognition, nothing beyond niche products.”

Government efforts to flush the underground economy to the surface have had mixed results. The state-run Bank du Caire has enjoyed some success as a specialized provider of small and midsize businesses as well as microcredit, loans of a few hundred dollars at high rates of interest.

Recently, the central bank ruled that small loans could be sourced from the high loan-loss reserves that many banks had built up: But few lenders have followed suit.

Some years ago, the Egyptian Exchange started a secondary bourse to help small businesses raise funds through share issues. But amid the uncertainties over Egypt’s political and economic future, exchange officials are struggling to recruit companies, despite relaxed listing requirements.

“This is a tough environment for small enterprises,” the chairman of the exchange, Mohammed Omran, said. “They think the time is not yet right.”

The Nation 2012-6-8
Cairo has always had its slums, among them tidy neighborhoods like Shobra and Agouza, which were once middle-class but have been abandoned over time to the poor and homeless—the “Egypt of rags and sores,” as novelist Lawrence Durrell put it. Over the past decade, however, a new and more sinister species of urban blight has advanced along the city’s outskirts: great honeycombs of mostly uninhabited apartment blocks, products of a vast unregulated economy without permits and inspections or public services like paved streets, lighting, sewage systems and clean water. Many were built by speculators and abandoned in mid-construction. Colonies of squatters have moved in, announcing themselves by the lines of laundry that protrude through windows like flags of capitulation.

Pop-up slums are only a small part of Hosni Mubarak’s legacy, the ousted dictator’s revenge on a nation whose natural resources he plundered and whose markets he rigged for his family and corrupt hangers-on. Having throttled even peaceful opposition throughout his thirty-year rule, he bequeaths a nation at war with itself ahead of the second round of its first free presidential elections. A once-molten political landscape has hardened into a handful of rival camps defined less by issues than by identity and class: Muslim and Christian, religious and secular, haves and have-nots, liberal-minded and security-conscious. Unless the new president can form a broad coalition government to confront the challenges that lie ahead, Egyptians could see years of partisan gridlock, with occasional interludes of violence.

The first round of electioneering in May produced a runoff between the two most divisive candidates: Mohammed Morsi of the powerful Muslim Brotherhood, and the law-and-order Ahmed Shafik, a Mubarak crony. Both men are creatures of an ossified establishment incompatible with the revolution’s liberal ideals. Shafik is regarded as feloul, a remnant of the old regime who would drag Egypt back to the wrong side of history, while Morsi’s Brotherhood (Ikhwan in Arabic) is a secretive, hierarchical order that rewards obedience, punishes dissenters and thrives on the politics of identity. Once widely respected for its decades-long resistance to the old regime, the Ikhwan has antagonized even orthodox Muslims since Mubarak’s departure with a series of ham-fisted miscalculations. The group assured Egyptians it sought only a minority bloc in Parliament, then fielded enough candidates to control half the seats; it promised to protect the virtue of the revolution, then colluded with the illiberal military that runs the country; it prohibited its members from running for president, but changed its mind midway through the campaign, when progressive contenders like Abdel Moneim Aboul Fotouh, an Ikhwan renegade, began polling well with voters.

Despite this, both Morsi and Shafik were able to prevail among a diverse field of candidates by appealing to their respective bases: Islamists on the one side, and, on the other, voters who, in turbulent Egypt, would trade one part liberty for an equal share of security—that slippery slope to autocracy that Benjamin Franklin warned about. The recent torching of Shafik’s campaign headquarters, as well as the outraged response to the dismissal on June 2 of corruption charges against Mubarak’s sons and the acquittal of six security officials charged with murder, shows how quickly Egyptian democracy can turn violent. As The Nation went to press, Morsi had allied with Fotouh and third-place candidate Hamdeen Sabahi to demand that election officials enforce the parliamentary legislation that disqualified Shafik because of his connection to the old regime. (The elder Mubarak, meanwhile, was sentenced to life in prison for accepting bribes and ordering a lethal response to peaceful protests.)

“Things are tense, and it will remain so for some time,” said Mohammed Habib, a former senior leader of the Muslim Brotherhood. “Violence is possible. I am not optimistic.”

* * *

After six decades of misrule—beginning with the wholesale nationalization of the Egyptian economy in the 1950s and ’60s by Gamal Abdel Nasser and the dispossession of minority groups, particularly the country’s Jewish merchant class—Egypt is broken and exhausted. The economy, which tumbled amid the uncertainty of Mubarak’s overthrow, has yet to achieve meaningful signs of recovery. The nation’s infrastructure is failing and there is no money, let alone a master plan, to rebuild it. The rate of tourist arrivals, the country’s most important source of hard currency, is at rock bottom, and the threat of a currency devaluation is keeping foreign investors at bay. Subsidies, some of them legacies of the Nasser era, are wasteful and biased toward industry at the expense of public goods and services. Banks choke on discarded government debt, even as small to midsize businesses—the backbone of the economy—are starved of capital.

Despite a free and fair legislative election in January and an imperfect but conclusive first-round presidential ballot in May, Egypt’s transition to civilian rule is far from certain. The government is administered by the Supreme Council of the Armed Forces, which has only tightened its grip on power since Mubarak’s toppling. The SCAF, already powerful economically with its lucrative share of the civilian economy, has marginalized rival agencies in the national security complex. Debate over the SCAF’s role in Egypt’s new democracy was all but absent before the first round of voting, and the generals are thought to have veto power over the soon-to-be-drafted Constitution.

“No one has tried to go after the deep state so far,” says Heba Morayef, the Cairo-based researcher for Human Rights Watch. “It used to be the State Security Investigations and the Mukhabarat at the center of power, with the military on the side. Now the military is doing everything. Whether you can peel that back is the big question.”

According to local human rights groups, security agents, with SCAF’s blessing, have been deployed to smother labor strikes, while conscripts man the production lines in army-owned factories. The military’s budget is cloaked in secrecy, as is its portfolio of commercial assets, which range from computer manufacturers to gas stations. (To coax the public into accepting proposed cuts in fuel subsidies, the SCAF is rumored to have engineered shortages of gasoline and delivery delays.) In December the military helped to replenish Egypt’s depleted treasury with a “loan” of $1 billion, a gesture that angered many Egyptians as brazen and cynical. Possibly as a hedge against a coup, it has also managed to top up the salaries of mid-ranking officers and enlisted men with generous monthly bonuses.

The SCAF’s main profit center is Egypt’s oil and gas sectors, which account for about 14 percent of economic output, and the ports and maritime authorities that process their exports. Through its holdings in Tharwa Petroleum, according to Shana Marshall and Joshua Stacher in the spring edition of Middle East Report, the military engages in energy exploration with several petroleum ventures involving Chinese and Italian firms. It also profits from Europe’s commercial links with China via enhanced traffic of Europe-bound Chinese goods through the Suez Canal Authority, which it administers.

In the past, competition for civilian assets from Egypt’s oligarchs kept the SCAF in check. Now, according to Marshall and Stacher, with so many Mubarak cronies under investigation or indicted in absentia, “the military is much freer to dictate its terms. With the power to determine the winners and losers at the commanding heights of Egypt’s capitalism, the SCAF will retain unchallengeable clout long after the formal return of civilian rule.”

The SCAF has a powerful advocate in Ahmed Shafik, a former air force general who is far more likely to collude with, rather than challenge, his former brother officers. (According to Egyptian press reports, junior officers in the security apparatus as well as civilian public servants were told by superiors to vote for Shafik, while military personnel, who are prohibited from voting, were told to mobilize their families on his behalf.) Brotherhood leaders have called for the military to declare the size of its budget, but they’ve also signaled that they must wait until the economy recovers before expending political capital in a fight with the SCAF.

“The army has always been the major power in Egypt,” says Nadeem Mansour, executive director of the Egyptian Center for Economic and Social Rights. “We need a long-term plan for asserting greater control over the military, but for now the most we can hope for is greater transparency.”

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Neither candidate is likely to repeal the economic policies that transformed the Egyptian economy during the last decade of Mubarak’s rule and, according to activists and some economists, set the stage for insurrection. In 2004, with Egypt laid low by a cash crunch similar to the one it faces today, the government responded by privatizing industry, deregulating the pound, lifting import tariffs, and cutting personal and corporate tax rates. By the end of the decade, the economy had achieved an average annual growth rate of about 6.5 percent and was lauded as a model of reform by doting supply-siders. But the dividends failed to percolate beyond a small circle of predatory elites. Egyptian banks, despite higher reserve requirements and improved balance sheets, declined to diversify away from their more lucrative clients—big corporations and the treasury—at the expense of family-run businesses aching for credit. The result was rising unemployment and inflation at a time of rapid growth. As of 2008, the number of Egyptians living below the poverty line accounted for 22 percent of the population, up from 17 percent in 2000. Add to that corruption associated with the sale of Egypt’s largest companies, together with the prospect of a dynastic transfer of power from Mubarak to his son Gamal—widely loathed as both the architect and benefactor of divestment—and a reckoning was unavoidable.

If there is common cause between Morsi and Shafik, it is in their embrace of the neoliberal policies that have proven so unpopular with voters. The Brotherhood, which in the event of a Morsi victory would control the executive and legislative wings of government as well as white-collar syndicates such as the teacher and medical associations, is famously pro–free market. Its all-powerful Number 2, deputy supreme guide Khairat El Shater, is a wealthy businessman and investor who has urged a new round of privatization, including the sale of public utilities. The Brotherhood also administers a vast network of charities and patronage systems, however, and its free-market faith is not unconditional: it opposes the country’s flat tax as regressive, embraces self-sufficiency in strategic commodities, and supports a minimum and maximum wage. In an interview, Shater told The Nation that the Ikhwan might even back government intervention to shore up the pound. “The free market has adapted over fifty years,” he said, “but not without state support.”

As the election enters its home stretch, Morsi would be wise to promote such a progressive agenda, given how well it served the leftist candidate Hamdeen Sabahi in his surprisingly strong showing in the first round. (Analysts contend that had Sabahi allied with Aboul Fotouh, the ex-Ikhwanist who finished fourth, they would have prevailed.)

Though recent indicators suggest that the economy has stabilized, the future is obscured by an overhang of sovereign debt assumed by local banks after panicked foreign investors dumped their holdings last year. In the year after Mubarak’s February 2011 overthrow, loans to the government held by Egyptian banks swelled to nearly two-thirds of total lending, an extraordinarily high ratio that crowds out lending to businesses and corporations. The banks are willing financiers, but only at yields of at least 16 percent, a price many economists regard as unsustainable. In October, Standard & Poor’s cut Egypt’s sovereign debt rating, and in May it downgraded four top banks, citing Cairo’s “reduced sovereign creditworthiness,” which “limits the government’s ability to provide extraordinary support to banks in the event of financial distress.” In other words, if the treasury defaults on its obligations, it may drag lenders down with it.

The country’s foreign exchange reserve has stabilized at about $15 billion, less than half the pre-revolution level, largely because foreigners have finally disposed of their Egyptian treasuries. While that has cheered some economists, others fear a devaluation of the pound. “It’s great that foreigners have finished selling Egyptian debt,” says a Cairo-based investor who requested anonymity, given the fragility of Egypt’s financial system. “But if you’re no longer breathing, it doesn’t mean you don’t need oxygen. It means you’re dying.”

The analyst conceded that a revival of foreign investment and the tourist trade is likely once the country stabilizes politically. “But then what happens?” he said. “The existing cash crunch will deepen and people will be forced to go to the black market for dollars and interest rates will rise. The government has a choice. It can either devalue the currency or do nothing and hope that things will slowly turn around. But that could end in a slow death.”

The good news, according to economists, is that the risk of default is minimal. Unlike the beleaguered banking sectors of Greece and Spain, which were undone by incendiary derivatives and bundled mortgages, Egyptian banks have contented themselves with basic loans and fixed-income deposits. Another factor working in Egypt’s favor is its enormous shadow economy. Only 10 percent of Egyptians have bank accounts, which means the majority of transactions go unreported. Despite the diminished reserves of hard currency, a nebula of informal business activity has kept the economy afloat through previous recessions, and it is likely to see the country through the current one.

Of course, this is hardly an unqualified blessing. As the Arab world’s largest market, Egypt should be a major financial center. Instead, it is burdened with some of the most risk-averse bankers in the region. According to Egyptian economist Tarek El Ghamrawy, credit for new investment is worth 3.5 percent of the total, compared with 12.8 percent for the Middle East/North Africa region. Only 4.2 percent of that amount is held by small businesses, which account for more than two-thirds of economic output. Shunned by the banks, business owners either borrow from family members or turn to independent lenders at usurious rates of interest.

Eluding the treasurer’s audit, the shadow economy represents billions of dollars of unrealized public revenue. It is where unregulated housing flourishes and where schoolteachers, to supplement their meager incomes, hold after-school “tutoring” sessions that students are all but obligated to attend. It hosts much of the “officer economy,” where indentured enlisted soldiers line kitchen appliances with insulation rather than develop skills for better jobs after their return to civilian life. In the shadow economy, supply bottlenecks can multiply the price of goods by a factor of four, and farmers are violently evicted from fertile land—an increasingly precious resource given Egypt’s diminishing water supply—at the pleasure of rich developers. In a country where anyone who works more than one hour a week is counted as employed, the shadow economy is home to an invisible mass of jobless Egyptians.

It is in the shadow economy that the nation’s enterprise and illegality cross-fertilize, and it is there that Egyptian democracy will succeed or fail. The outlook is not good. The appeal of candidates Morsi and Shafik, figureheads of modern Egypt’s two most powerful warring tribes, is confined to the severely religious and the profoundly frightened. So irreconcilable are their competing values that it’s hard to believe they would lock arms for the greater good. For generations the Ikhwan and Egypt’s dictators struggled against each other like matter and antimatter, only to resume their war in the china shop of the nation’s new order. Just as the Ikhwan distinguished itself by resisting Mubarak, so does Shafik owe his resurrection to the Brotherhood’s outsized and off-putting belief in its own entitlement—first over the syndicates, then Parliament and finally the president’s office. Shafik may lose the election, but his constituency, a tactical alliance of secularists, Christians and pious Muslims unnerved by the prospect of single-party rule, will survive him unless the Brotherhood ditches its parochial parapet for an ecumenical big tent. Otherwise, the prospect of another revolt—one driven more by the need for food than the desire for political emancipation—will intensify in lockstep with Egypt’s economic and social debility.

A decade ago, when he was a member of Parliament, Morsi spent a day with me in his home district in the Nile Delta. We met at the local university, where he lectured as a professor of engineering, and as we prepared to embark on his scheduled rounds, he lamented the dire mismatch between the demands of Egypt’s youth and the diminishing returns of its economy. At one point, he gestured to the students around him. “When these students graduate, where will they go?” he asked. “We have 200,000 graduates in the market, and there are no jobs.”

Washington Post 2012-2-10
CAIRO — There is no more potent symbol of Egypt’s economic fragility than the pocket bread that is a staple of life here.

Every day, the Egyptian government allocates 25-pound bags of subsidized flour to designated bakeries to produce the Frisbee-shaped loaves, which Egypt’s impoverished and working poor buy for about eight cents per 10 loaves. But sometimes, there is not enough to go around.

While fertile land is abundant in Egypt, particularly along the Nile, the country relies on foreign producers for nearly all of its agricultural needs — including wheat. And though the state sets prices on basic goods such as bread and heating oil, when the cost of imported commodities goes up, the underground economy flourishes. Some bakers sell their flour allotment on the black market instead of making bread, prompting shortages, long lines and, sometimes, unruly crowds.

Egypt’s slide from breadbasket of the eastern Mediterranean to net grain importer is elemental to an economic crisis that threatens to convulse the nation. According to economists and farm experts, several factors are complicit in the decline: an Egyptian government that for years refused to build the infrastructure needed to produce wheat in a cost-effective way; a privatization drive that plundered Egyptian agriculture with ill-advised and often corrupt divestment deals; farmers who sold their fields to property developers or diversified into more profitable crops for export at the expense of grains; and the U.S. government, which promoted sales of American wheat in Egypt rather than encouraging greater self-reliance.

Today, Egypt imports about 80 percent of its agricultural products, and with a currency devaluation expected sometime this year, consumers are bracing for more costly foreign goods across the board. The country labors under a chronic balance-of-payments deficit. And inflation, already at 9 percent, is expected to increase in the coming months along with borrowing costs. Already, lines of motorists anxious about fuel supplies, another subsidized commodity, have been radiating from gas stations.

‘Everything starts with the farm’

In a country where 40 percent of the population lives on less than $2 a day, subsidized bread is considered a basic human entitlement. Efforts to lift price supports have fueled riots, most severely in 1977, when President Anwar Sadat was forced to reinstate them, and inexpensive bread was hailed alongside freedom and social justice as the clarion call of the revolt that deposed President Hosni Mubarak a year ago. But economic distress has only intensified since Mubarak’s ouster, raising the possibility of more social instability and violence.

“Everything starts with the farm,” said Mohammed Barghash, who chairs Cairo’s As-Salam Agriculture Association. “If a country is unable to provide its own food, it is not worthy of the name.”

Not surprisingly, most of the blame for Egypt’s food insecurity is heaped on Mubarak. Two of his last three ministers of agriculture are in jail, charged with, among other things, allowing tainted pesticides into the country and selling prime farmland to regime cronies for a fraction of its market value. “Hosni Mubarak killed Egyptian agriculture,” said economist Mohammed Gouda, who was raised by cotton growers. “It was not done by benign neglect. It was malign and corrupt.”

Throughout Mubarak’s rule, according to Egyptian farmers, the government failed to provide irrigation and electricity systems that are vital to the production of water-intensive crops, particularly in a desert country with a meteoric population growth rate.

A farmer who owns several thousand acres of land northeast of Cairo says his family managed to connect to an electrical grid just two years ago after relying for decades on costly generators. Even then, the Ministry of Agriculture did little more than issue the necessary permits. “We did pretty much everything ourselves, including the financing,” said the grower, who asked that he not be identified by name for fear he might need more permits. “There was no government plan.”

Deregulation, a hallmark of the economic reforms promoted by Mubarak, also had a negative impact on Egypt’s wheat belt. As free-trade deals in the 1990s unlocked new markets to Egyptian commerce, growers abandoned low-margin crops in favor of higher-value products such as fruit and cut flowers. At the same time, they succumbed to the call of rising property prices by selling grain fields to developers, often in defiance of zoning laws.

“There has been a lot of illegal building of homes on some of the country’s most fertile land,” said Wael Ziada, head of research at investment bank EFG-Hermes. “You can hardly blame [the growers] given the lack of incentives to remain on the land.”

The U.S. role

It was the U.S. government, in tandem with the International Monetary Fund and the World Bank, that strongly encouraged Cairo to liberalize its economy and expand its share of regional trade. Washington feathers the Egyp­tian-Israeli peace treaty it brokered in 1979 with generous allocations to Egypt of civilian aid, most of which is administered under the U.S. Agency for International Development, Washington’s humanitarian assistance policy arm.

Even as USAID has plowed well over a billion dollars into rural Egypt, mostly in the form of training courses and water-management programs, many farmers complain that the decline of Egyptian agriculture is as much an American failure as it is a local one.

Washington Post 2012-2-3
CAIRO — Egypt is on the brink of political and economic collapse and the West has an obligation to sustain the country with financial aid and diplomatic support, a senior Muslim Brotherhood official has warned.

Khairat El-Shater, deputy supreme guide of the Islamist movement that controls half the Egyptian parliament, said this week that the United States and Europe are neglecting Egypt at their peril a year after a popular uprising deposed a key U.S. ally in former president Hosni Mubarak.

“The democratic transition in Egypt is hanging in the balance,” Shater said this week at the Brotherhood’s headquarters in a Cairo suburb. “We strongly advise the Americans and the Europeans to support Egypt during this critical period as compensation for the many years they supported a brutal dictatorship.”

Shater’s appeal was extraordinary, coming as it did from a group the United States had long kept at arm’s length out of respect for Mubarak, who persecuted the Brotherhood as a threat to his secular rule. It was only two months ago that high-level U.S. officials engaged in rare formal meetings with senior Brotherhood members, many of whom regard Washington warily for its unstinting support of Mubarak.

Since Mubarak’s ouster, the Egyptian economy has suffered from capital flight, rising inflation, a yawning balance-of-payments deficit and a failed bid to stabilize the local currency that halved its foreign reserves. An economic meltdown, Shater warned, would “transform a peaceful revolution into a hunger revolution” with traumatic consequences for U.S. interests in the region. Tensions in Egypt boiled over this week in response to the deaths of more than seventy people at a soccer riot in Port Said, an incident rumored to have had political motivations.

The United States has been cautious in its approach to Egypt since Mubarak’s fall, supporting its transition to civilian rule while insisting that its freely elected parliament uphold the country’s international accords, particularly its peace treaty with Israel. Washington has been sharply critical of the government’s move last month to prohibit several American NGO workers, including the son of U.S. transportation Secretary Ray LaHood, from leaving the country.

But Shater admonished the U.S. government for its long support of Mubarak at the expense of the Egyptian people.

The 61-year-old Shater made his remarks as relations between Washington and Cairo have decayed amid reports the White House is pressuring Egypt’s military-run interim government to hasten a transition to civilian rule.

He warned against a reduction in U.S. aid to Egypt, a reference to recent reports that the Obama administration has threatened to cut Washington’s annual $1.3 billion package of military assistance, a legacy of Egypt’s three-decade old peace treaty with Israel.

Shater, an engineer by training, is widely regarded as a shrewd pragmatist informed by a successful business career and the 12 years he spent in Mubarak’s prisons. He has emerged as a powerful voice in a country polarized by the generals in power, an Islamist revival and a loose coalition of secular groups that led the anti-Mubarak revolt only to lose badly at the ballot box.

Shater’s investment returns are thought to be so crucial to the sustainability of the Brotherhood’s charitable works that his assets were seized several years ago by the government.

In the interview, Shater played down his influence over an organization known for its rigid hierarchy. Nevertheless, he is thought to be the driving force behind recent Brotherhood commitments to recognize Egypt’s diplomatic and trade accords with Israel and to not impose Islamist strictures such as dress codes on women and bans on alcohol.

“The general feeling is that he is the one who is making these decisions,” said Ibrahim Zaafarani, a former group member who heads Cairo’s Arab Doctors Association.

Respect for Shater as an astute businessman and dissident is tempered among some liberal activists for what they say is his overly conciliatory regard for Egypt’s military leaders, who have justified for security’s sake crackdowns on peaceful demonstrations and restrictions on press freedoms.

Shater emphasized that his assets remain in state hands a year after Mubarak’s departure and that exiled Brotherhood members are still living abroad for fear they would be arrested should they return to Egypt — proof, he said, that the Islamist group and the military have not made a deal to protect each other.

“The army has been ruling Egypt for more than 60 years,” he said. “The transition from military rule will take a gradual approach, though this does not sit well with those who take to the streets demanding that the military leave immediately.”

Washington Post 2012-2-1
CAIRO — A little over a year ago, on the eve of the revolution that ousted Egyptian autocrat Hosni Mubarak, Hisham Kassem was poised to launch the Arab world’s first independently owned multimedia news company. But the revolution failed to redeem its promise of full democracy, press freedoms deteriorated, the economy tanked, and Kassem’s shareholders abandoned him.

“Investors started missing payments in June,” Kassem says from his half-finished offices in downtown Cairo. “By late August I was cash-strapped.”

Kassem, who during the twilight of the Mubarak regime did as much as anyone to create pockets of oxygen for hard-hitting journalism, says he is confident that his Egyptian shareholders will return from the sidelines once the country stabilizes politically. Though recent elections turned out an Islamist-dominated parliament, he notes, the process was smooth, setting the stage for a presidential election this year and the end to an unpopular military-led interim government. Venture capitalists are showing renewed interest in his enterprise, the name of which he declines to divulge, and, he said, he’s getting fresh offers for shares.

Even Kassem admits, however, that there is no guarantee Egypt’s national security apparatus, which survived the revolution more or less intact, will go quietly.

During the last few years of Mubarak’s rule, the country’s draconian press laws were loosened so that criticism of the regime was tolerated, if grudgingly and arbitrarily, and independent journals and magazines proliferated. But even that modest flowering was crushed by the ruling military council not long after Mubarak’s removal, according to journalists, with what they suspect is a stealth campaign of harassment.

“The pressure is now worse than ever,” says Ibrahim Eissa, an activist and publisher who last spring launched Tahrir, a newspaper and broadcast company named after the square that served as the locus of the anti-Mubarak movement. “The government passes laws that make it harder to publish. Now, anyone can declare themselves slandered by a story and demand fines. Of course, it’s impossible to say who’s behind these attacks.”

Growth potential

Investor interest in Egypt’s media sector and its enormous growth potential remains high, however. Though less than a fifth of the country’s 85 million people read daily newspapers, that could change if outlets like Kassem’s venture, which will generate print, television, radio and Web-driven content, take root. Internet usage is still relatively low, which means newspapers, radio and television broadcasters will be commercially sustainable for some time. Plus, the country’s state-run press and broadcasters, as unpopular as they are costly to run, are likely to consolidate or disappear altogether, creating new market share for independents.

Buoyed by such projections, Kassem says he will not hesitate to reengage the spooks and functionaries whose job it is to obscure truth from power. In the late 1990s he launched the English-language Cairo Times, a general interest monthly and a must-read for Cairenes outraged at Mubarak’s brutality. Exhausted, he closed shop after several years of prolonged skirmishes with regime censors as the only independent publication of its kind. In 2003 he was recruited to edit Al Masry Al Youm, an independent daily newspaper, and under his watch it evolved into an authentic and profitable dissenting voice.

Issandr El Amrani, who worked for Kassem at the Cairo Times as a journeyman reporter, remembers his old boss as a Middle East H.L. Mencken, equal parts stern, parsimonious and shrewd. “He proved you can make a successful business out of a good publication,” says Amrani, who now edits The Arabist Web site. “And that was before there was so much to write and read about.”

In 2008, Kassem resigned from Al Masry Al Youm to begin the spadework for a landmark Arab media conglomerate. He toured the world’s great newsrooms to learn how to develop his own news management system and organized a road show to line up 30 million pounds (about $5.2 million) in start-up capital — under Egypt’s press law, he is prohibited from raising funds from non-Egyptians.

As 2010 approached, he had signed a lease for two floors of prime office space and he was negotiating with an architect the fine points of the floor plan, from the thickness of sound-proofing tiles in the recording studios to the wattage of recessed halogen bulbs in the newsroom. He was just about to start hiring staff when the rebellion against Mubarak gripped the nation and consumed the world.

A push for ‘good governance’

Today, despite Egypt’s difficult economic environment, Kassem is optimistic. In a few weeks, he says, he’ll be accepting applications for the 60 or so positions that will round out the staff and he expects some 5,000 submissions. “I’m not exaggerating when I say every journalist in town wants to join us,” he says.

The vacant offices are silent except for the whir of a small refrigerator and the din of Cairo’s relentless traffic that pulses up from below. Kassem recalls how, when he was running the Cairo Times, he was ordered by the censors to stop reporting on a $60 billion residential and water-irrigation development, which like so many Pharaonic projects conceived under Mubarak was regarded as a corrupt land grab for regime cronies.

“We were told ‘don’t touch it’ and we had to leave it alone.” he said. “No more. There needs to be an end to graft and corruption and a move to good governance and if I’m doing my job here, it can happen.”

CAIRO — A year after the revolution that toppled Hosni Mubarak, Egypt’s Muslim Brotherhood, the dominant party in a new parliament, has a clear mandate to lead Egypt as it confronts its most serious threat: an exhausted, evaporating economy.

And so far, the Islamist group appears willing to respect a secular status quo, emphasizing accommodation over conflict, working with international bankers to help restore economic growth, and playing down more orthodox calls for bans on bikinis and alcohol.

“A lot of people don’t appreciate how conservative the Brotherhood is, and by that I mean cautious as well as pious,” said a Cairo-based banker who did not want to be quoted discussing political issues. “They prefer conciliation over confrontation, particularly now that they’ll be held responsible for what happens to the economy.”

It remains unclear just how much authority over economic matters the country’s military rulers will permit the new parliament, where nearly half the seats will be held by the Brotherhood’s Freedom and Justice Party, the victor in historic elections. But the party has moved quickly to assert a leadership role.

Last week, the party announced that it would not meddle with the industrial zones jointly managed by Egypt and Israel to promote trade between the two peace partners. The party has held meetings with a delegation from the International Monetary Fund to discuss a $3 billion bailout that was rejected last summer by Egypt’s military-led government. The party also has assured tour operators that it would not support legislation that would prohibit women from wearing revealing swimwear at beach resorts.

What appears to be tactical restraint, however, might be less political calculation on the Brotherhood’s part than a reaffirmation of its mercantilist sensibility. Its members are well represented among Egypt’s white-collar middle and merchant classes, and many hold senior positions among the country’s professional guilds, or syndicates. (By contrast, the hard-line Islamist Salafists, who won a quarter of the parliament seats as members of the Nour party, draw their support largely from rural and lower-class Egyptians.)

Though admired for its patronage systems that provide food, education and health care to Egypt’s poor, the Brotherhood’s economic agenda is informed by an ancient laissez-faire tradition that has more in common with the values of the United States’ tea party than it does with, say, the more heavily regulated economies of Europe. In the 1950s, for example, the group struggled against President Gamal Abdel Nasser as much for his decision to nationalize the Egyptian economy as for his fierce secularism.

Brotherhood members trace their capitalist conceit to the birth of Islam and tend to associate one with the other. “Islam endorses the market economy and free trade,” Abdel Hamid Abuzaid, a Muslim Brotherhood member and economist at Cairo University, said in an interview before his death last year. “It is part and parcel of Islam as a complete way of life.”

A market in crisis

Not for nothing, Brotherhood members are fond of reminding Westerners, did Ronald Reagan suggest that the philosophies of Ibn Khaldun, a 14th-century Islamic scholar, anticipated the Laffer Curve by 600 years. The group has supported lower taxes and is staunchly antitrust, owing to a verse in the Koran: “He who brings commodities to the market is good, but he who practices monopolies is evil.”

Skeptics of the free market — Egypt has a broad political spectrum that includes a small, if plucky, Communist Party and a cadre of Trotskyites — point out that the Brotherhood’s neo-liberal agenda differs little from the one promoted during the twilight of the Mubarak regime. It was popular outrage over the government’s corrupt privatization plan and the job losses that followed, they argue, that fueled the revolt against Mubarak in the first place. Small wonder, then, that stumping Freedom and Justice Party candidates spoke vaguely about economic policy, lingering more over the imperatives of “social justice” and “equitable distribution of production” than over the need for fiscal restraint.

Now, with the economy all but vacant of foreign investors and tourists, both vital sources of hard currency, the need for a coherent reform plan is inescapable. Egypt’s gross domestic product is expected to grow by a mere 0.4 percent this year, down from last year’s modest rate of 1.8 percent. Foreign reserves have dwindled by half over the past 12 months — to $18 billion, equal to four months of imports — because of the government’s decision to protect the Egyptian pound. Borrowing costs are rising and currency devaluation is unavoidable, say many economists, a prospect that has triggered panicked buying of gasoline and long lines at filling stations. Inflation, which averaged 9 percent in the second half of 2011, is expected to accelerate this year.

The Freedom and Justice Party’s “Program for Economic Development” calls for an end to corruption and chronic unemployment, enhanced productivity, revived foreign investment, a narrowing of income disparity and reform of Egypt’s long-neglected agricultural sector — the kind of pale nostrums one might expect from a group that has little experience ministering to a robust economy, let alone one racked by the convulsions of the past 12 months. Even staunch secularists, however, allow that the Brotherhood’s electoral success after decades in opposition confers upon it legitimacy and redemption that is, at the very least, worth the benefit of the doubt.

“The Muslim Brotherhood did not come from nowhere,” said Amr Hussein Elalfy, an analyst at Cairo’s CI Capital, an Egyptian investment bank. “It is deeply ingrained in the grass roots. They have their patronage systems and they are pro-investment. They want things to move ahead, and this is their first and best chance.”

The Nation 2011-8-26
Mohammed Habib lives in a suburb of Cairo just beyond the ring of tenement housing that is closing in on the city like a noose. His flat is small but well kept, with great towers of stacked books erected from the floor and tables.

This has been Habib’s place of self-imposed exile since he and his allies in the Muslim Brotherhood lost a struggle for control of the Islamist group eighteen months ago. It was generally assumed that Habib, as the then-deputy chairman, would be elected chairman when Mohammed Akef, who had held the post for six years, announced he was stepping down. When the vote was held in January 2010, however, Habib was upset by Mohammed Badie, a conservative and relatively obscure member of the Brotherhood’s governing council, known as the Guidance Bureau. Delivering his acceptance speech, according to Habib, Badie referred affectionately to Egypt’s then-dictator Hosni Mubarak as “the father of Egypt,” and he implied the Brotherhood would accept a dynastic transfer of power to Mubarak’s son Gamal. Not long after that, several Badie allies were released from prison after long periods of detention.

Badie’s remarks, to say nothing of the election results, were a surprise to pretty much everyone but Habib. “Four months before the election,” he told me, “I received information through leads within the group that Badie would be the next Supreme Guide. I believe there was an agreement between Badie and his supporters and the government. The rest of us were strongly opposed to Gamal Mubarak and his succession.”

Predictably, Brotherhood leaders deny such a deal was made, though talk of an agreement has circulated within the group. “It’s been mentioned,” said a rank-and-file member who requested anonymity so as to avoid reprimand. “An official on the Guidance Bureau told me. And while I’d rather not believe in such a thing, it may contain a bit of truth.”

I met with Habib in June. Until then, he had kept his account of the transition largely to himself. So much had happened since February, however, when Mubarak and his ruling circle were ousted in a popular revolt, that he decided to come forward in interviews and with writings of his own. National elections have been scheduled for November, and the Ikhwan, as the Muslim Brotherhood is known in Arabic, is expected to win a plurality of seats in Parliament. Almost overnight Egypt, once the wellspring of Arab politics and culture before it was rendered mute by a half-century of one-party rule, has been transformed into a fragile young democracy. At the center of this whirlwind is the Ikhwan, one of Egypt’s oldest political movements, one that has survived decades of persecution by resisting and accommodating sequential fashions of autocracy, from monarchy to secular dictatorship. Now freed along with the rest of the country, and seemingly within reach of unprecedented power, the Brotherhood faces the prospect of implosion. Though it can now openly organize and contest elections, that same process is deepening longstanding fault lines within the group that threaten its dissolution.

“The Ikhwan is behaving as if the entire political system is in its grip,” Habib said. “In fact, there are fissures, and they may be to the very core. There is concern among the younger members that the leadership does not understand what’s going on around it. But their opinions are being cast aside, just as they were under Mubarak.”

Fractures within the Brotherhood are nothing new. Since its founding in 1928 by revivalist Hassan al-Banna, the Ikhwan has been home to competing visions of Islam and the group’s role in Egyptian society. The impulse among some leaders to engage in politics and revolution, both peaceful and violent, rather than confine themselves to proselytizing and social work has at times threatened to destroy the group. A failed bid in October 1954 by a Brotherhood faction to assassinate Egyptian President Gamal Abdel Nasser, the fierce secularist who led Egypt throughout the 1950s and ’60s, ended with mass arrests of Ikhwanists and the torture of the plot’s alleged leaders, including radical author and Islamic theorist Sayyid Qutb. (Al Qaeda leader Ayman al-Zawahiri was a Qutb disciple.)

Schismatics aside, the Brotherhood has remained whole largely by entering into tactical ententes with the state and nurturing social networks that are the basis of its political muscle. If Banna was a rebel—he lashed out against what he regarded as Cairo’s corrupt political elites, neo-imperialism and Zionism, and the social salons that were Westernizing Egypt and Islam—he was conflicted about the use of violence even when deployed against the country’s British occupiers. “Revolution is not part of the Brotherhood’s ideology,” said Habib. “Even Hassan al-Banna never spoke of it. The objective has always been to reform the system from within, not to replace it with a new one.”

The Brotherhood allied with Anwar Sadat, Nasser’s successor, in his battles with leftists, only to turn against him along with other Islamist groups once he recognized Israel in 1979. (Sadat’s assassination in 1981 was the work of a handful of rogue Ikhwan members and other radical Islamists, along with colluding military officers.) The Brotherhood’s relations with Mubarak were equally volatile; the two sides shared an uneasy truce during the 1990s, when the regime fought a low-level civil war with militant organizations like Al-Gama’a al-Islamiyya. In 2005, however, when Brotherhood candidates won the largest opposition bloc in parliamentary elections—they were allowed to campaign only as independents—Mubarak unleashed an extrajudicial assault on the group, detaining and torturing members under emergency security measures in place since Sadat’s assassination. In 2008 the government modified the Constitution to prohibit independent candidates from running for Parliament, a move clearly aimed at the Ikhwan. For good measure, it arrested thousands of its members, many of whom were tried in military courts.

It was largely in response to Mubarak’s iron hand, quietly abetted by the Bush administration and the US Congress, that the more conservative Ikhwan members became disillusioned with Akef and his policy of engaging non-Islamist dissidents in opposition to the regime. Younger members, however, pushed for more aggressive outreach to the secular world, not unlike the way Banna had challenged the religious hierarchy of his day. In a November 2008 interview, a 20-year-old Brotherhood member named Mohammed Adel told me of a growing restlessness among the youth cadres, some of whom were working with secular movements to unseat Mubarak through peaceful means. A website designer, Adel said he and a handful of young dissidents had launched an alternative to the Brotherhood’s official website, one that featured a page soliciting constructive criticism of the group. It was a hit among the Ikhwan’s youth, but the leadership ordered it removed.

“There are no dissenting ideas within the Ikhwan,” Adel told me in a coffee shop just off Tahrir Square, where thousands of demonstrators would later stage the peaceful rebellion that led to Mubarak’s eviction. “There are younger members who want to deviate from the old guard’s ways, to work with other political streams and to take action in the streets with the language of renewal, the language of the young. You also have young people who want representation in the leadership, but they have none.”

Adel, who was raised as an Ikhwanist in a family filled with them, said he participated in a day of peaceful protest launched by oppositionists in the spring of 2008. The April 6 Youth Movement, as it is known, was organized on Facebook and had particular appeal among Egypt’s angry and unemployed youth. Many young Brotherhood members joined in the demonstration in defiance of their elders’ objections. Three years later, they would do so again, with far more conclusive results.

The Ikhwan leadership was famously slow to involve itself in the anti-Mubarak rebellion that began in Tahrir Square on January 25. Even as their young brethren, in tandem with secularists and Coptic Christians, manned the barricades that kept regime thugs from clearing the area, senior Brotherhood members were loath to join a movement that was antithetical to the Ikhwan’s near-sacred embrace of gradualism. Only when it was clear Mubarak was on his way out, say dissident Ikhwanists, did Badie and other group elders officially endorse the movement. Even worse, critics say, it broke ranks with a coalition of opposition leaders by negotiating with Omar Suleiman, Mubarak’s intelligence chief and unofficial chamberlain, who briefly became Egypt’s de facto head of state after the president stepped down.

When the Supreme Council of the Armed Forces (SCAF) established a transitional government in response to popular demands for order in the chaotic aftermath of Mubarak’s departure, it entered into a tacit partnership with senior Brotherhood leaders to restore order. At the time, military leaders told reporters that it was only natural that it would leverage the group’s sizable network to clear the streets. That has not stopped a drumbeat of speculation that the two sides had cut a less prosaic deal: in exchange for the release from prison of Ikhwan members, it was argued, the leadership would keep silent about the military’s preponderant and profoundly undemocratic role in Egyptian industry, from textile milling to the tourism trade, just as it had agreed to support a dynastic transfer of presidential power eighteen months earlier. “They brokered a deal,” said an industrialist with close ties to the military who spoke on the strictest condition of anonymity. “The army said we’ll get your guys out of jail so long as you don’t challenge the new regime at a time of great instability.”

Elijah Zarwan, the Egyptian representative of the International Crisis Group, said the evidence of Ikhwan–military complicity is empirical. “It’s no great secret,” he said. “Just look at the facts. From the military’s side, they got the Muslim Brotherhood’s vast network to take people off the streets when there was no alternative. It was a way to end the bloodshed. So what did the Brotherhood get? They got their members out of prison, a political party that is allowed to campaign in the open and direct involvement in the drafting of the post-Mubarak Constitution.” Whether the agreement extends to the military’s economic interests remains to be seen, however. (Interestingly, one of the Ikhwanists released from prison after serving just more than half of a seven-year sentence was Khairet al-Shater, one of the Brotherhood’s most influential members and, according to a member of the youth league, the most forceful voice in opposition to its demands for a greater say in the group’s internal affairs.)

The Brotherhood’s Freedom and Justice Party is by far the most capable political machine in Egypt’s young democracy, given the estimated 600,000 Ikhwanists at its disposal, though it has gradually estranged itself from the very movement that made this possible. It has boycotted several demonstrations and revolutionary councils, including the May 7 National Conference, in which more than 1,000 delegates from parties and movements called for more aggressive democratic reform. It has opposed calls for a constitution to be written ahead of the fall elections, on the grounds that this clashes with the results of a March referendum, in which 77 percent of voters preferred that balloting be held as soon as possible. Such an outcome was welcomed by the Brotherhood, which is far better organized than its secular rivals.

Not long after Mubarak’s overthrow, the Ikhwan demanded that Coptic Christians, who constitute about 10 percent of Egypt’s population, and women be prohibited from running for president, and it has condemned as “sinners” those who have demonstrated against the SCAF. It has also entered into an alliance with a proliferation of Salafi (fundamentalist Islamist) groups, including at least one Salafi political party, which would all but guarantee an Islamist majority in Parliament should its compact prevail in the upcoming ballot. In July tens of thousands of largely Salafi activists jammed Tahrir Square in a compelling show of force, effectively Islamizing a parcel of Cairo known to the world as an idyll of ecumenicalism. Mocking the secularist chants of “Christian, Muslim, we’re all Egyptians” that had echoed throughout the square during the rebellion, these protesters bellowed “Islamic, Islamic, neither secular nor liberal.” The secular demonstrations, which had been promoted as a display of national unity, were overwhelmed by Islamist voices, particularly Salafi demands for strict adherence to Sharia law.

Under Mubarak, Salafis worshiped largely underground, and their growing clout has caught many observers by surprise. Now in a spoiler role in the upcoming elections, they could undermine as well as enhance the Ikhwan’s prospects. Just as liberal splittists may peel away votes from the Brotherhood’s left, Salafis may cherry-pick them from its right. “We got rid of Mubarak,” Sheik Mohammed Farahat, a leading Salafi sheik, told me over dinner in a Cairo cafe that, interestingly, served beer and wine. “Now anyone who fights us will lose. There has been no compromise with my Coptic friends, but there is no problem so long as they don’t cross the constants of Sharia.” It was a remark both disingenuous and chilling, implying as it did that Islamists, and not secularists, did the heavy lifting that deposed Mubarak, and that the only good Coptic is a supine one.

What of the Ikhwan? “We all follow the same principles, only we follow the texts literally,” said Farahat. “The Ikhwan tends to maneuver politically; it is very Machiavellian. Either way, the past era of secular liberalism is over.”

In an interview, Ikwhan spokesman Mohamed Saad el-Katatni dismissed talk of secret deals and accommodation between the group and the state, either under the SCAF or the ancien régime. The Brotherhood, he said, had always been opposed to the dynastic elevation of Gamal Mubarak as president. While he was unaware of any remarks by Badie that characterized Hosni Mubarak as a national patriarch, he said, “They may have been made in the spirit of our culture of respect for elder leaders, devoid of political content.” Far from negotiating with Omar Suleiman unilaterally, he said, the Ikhwan did so in a public meeting “on terms that included all political forces.” The National Conference, said Katatni, was an attempt to undermine the results of the March referendum. “Our policy is the will of the people, even if it is contrary to our own preference,” he said. “We have no plans to dominate Parliament.”

The day before my interview with Katatni, the Ikhwan expelled Dr. Abdel Moneim Abou el-Fotouh, one of the Brotherhood’s most respected members, for refusing to relinquish his independent presidential campaign. The leadership had declared the presidency off-limits to its members to ease public anxiety about its ambitions, and Fotouh’s renegade bid had revealed a deep split within the Ikhwan at its most senior levels. According to Katatni, the last time such a high-ranking member had been dismissed from the Brotherhood was in 1954, in the aftermath of the attempt on Nasser’s life.

Fotouh, who also served as the general secretary of the Arab Medical Association, has been a stalwart and pioneering proponent of ecumenicalism, liberal governance and a progressive Muslim Brotherhood. In a June interview with the New York Times, he declared that “people must have a free will.” He expressed support for the peace treaty between Egypt and Israel, and he insisted there was nothing incompatible between Western values and his interpretation of Islam. When I met Fotouh several years ago, he presciently implied that the weight of democracy would splinter Ikhwan solidarity. “The Muslim Brotherhood has a vision to interact with society, but you also have people who are narrow-minded,” he said. “There is greater awareness among the young, and they can make a difference in free elections. Otherwise, there will be an explosion.”

Many among the Brotherhood’s youth regard Fotouh as a mentor, and his banishment only hardened their resentment of the old guard. As news of Fotouh’s dismissal broke, Islam Lotfy, a 33-year-old lawyer, and a circle of fellow Ikhwanists were preparing to launch their own party in response to the Brotherhood’s refusal to consider their demands for more activist and inclusive expression. On a humid night in June, Lotfy told me the decision to break with the Ikhwan was taken only after attempts at negotiation had failed. “Our vision was heard but ignored,” he told me. “People were helping us project our beliefs, not only in Cairo but [Brotherhood] leaders in London, Kuwait and Palestine. But the leadership is undemocratic, and it will not allow us to reach out to other groups, period.”

The new party, which will contest the fall elections under the name Egyptian Current, was unveiled a few days later. Among its 5,000 members are some 200 dissident Brotherhood adherents, according to Lotfy. He described Egyptian Current not as secular—the word has been demagogued in post-Mubarak Egypt, just as it has in some right-wing quarters in the United States—but “pragmatic and nonideological.” He would just as much take advice from a Marxist as he would from a capitalist, he said, if it was found to be the most practical.

Lotfy said he expected to share Fotouh’s fate as a defector, and within days of our meeting he and four other Egyptian Current leaders were indeed expelled from the Brotherhood. The old guard, he told me, “cannot comprehend that we need to reach the people. In the Ikhwan literature there is no space for revolution in Islam. It is not in their culture, and now they’re in a dilemma. This is a revolution, and they don’t know how to interact with it.”

The only sustainable role for the Brotherhood in a democracy, according to Lotfy and his comrades among the Ikhwan youth, is its traditional mission as a social network and charitable movement of a moderate religious character. In that sense, he suggested, the ejection of liberal-minded members like him and Fotouh is part of an organic return by the group to its roots. “It is of important value,” Lotfy told me, “but when it comes to politics, they should stop or reform themselves completely.” Another frustrated young Ikhwanist and Lotfy ally, Mohammed al-Gebba, put it this way: “The Brotherhood must either return to religious outreach and social work, with its members campaigning as members of other parties, or it will bring itself down within the next few years. Politics and outreach are not reconcilable. One compromises the other.”

Recently, a senior Brotherhood official announced that any Egyptian citizen should be eligible to run for president, an apparent easing of its earlier proscription against Copts and women, and it has entered into an alliance with its old rival, the secular Al Wafd Party. While such gestures could be interpreted as a nod to the center after months of overreaching, it is not at all certain the Ikhwan can sustain itself in a democracy as it struggles to prevail against the fissionable agents of election fever. Throughout the century-long history of the modern Middle East, no political movement has proved itself so resilient as the Muslim Brotherhood. The tools of governance are different from the tools of survival, however, and the Ikhwan’s inelastic old guard has already seriously damaged itself trying to wield both at the same time.

The Investigative Fund 2011-8-25
Sheik Mohammed Farahat was waiting patiently for me when we met for dinner recently in downtown Cairo. He is a prominent Salafi cleric, which means he and his followers interpret Islam with a rather antique set of reference points. Specifically, they live and worship as they believe the Prophet Mohammed and his followers did during the formative years of Islam. The consequences of this are mixed: while the Muslim world during the Middle Ages was commendably tolerant and the epicenter of global commerce, it was also a brutal place with violent punishment for less than capital crimes such as adultery and theft.

Until my dinner with Farahat, I'd never come across a Salafi in a dozen years of reporting from Egypt. Egypt has no shortage of religious fundamentalists, including an architect or two of what would become Al Qaeda. But the Salafis are a different species entirely, more doctrinaire when it comes to social mores than the bourgeois Muslim Brotherhood, and emphatically opposed to the terrorism embraced by Al Qaeda and other radical groups. Their jihad, it seems, is to restore in their minds and communities what they believe is the purity and sanctity of Islam during its seventh-century genesis.

Since the eviction of dictator Hosni Mubarak in a non-violent coup seven months ago, Egypt's Salafis have enjoyed a spiritual as well as political revival. This was one of the more surprising byproducts of the uprising, as in principle Salafis confine themselves to religious study and generally eschew temporal affairs of state. Since the rebellion, however, several Salafi political parties have emerged and they are expected to field candidates in national elections in the fall. In late June, a demonstration promoted as a national unity rally was quickly overrun by tens of thousands of well-organized Salafis activists. Not only were secular protestors stunned by their numbers and discipline, they scandalized members of the entrenched Muslim Brotherhood, which is expected to garner a plurality of parliamentary seats in the upcoming elections. The comparably mainstream group had hoped to appeal to conservative voters by associating with Salafi leaders, only to alienate the vast Egyptian middle with the specter of bearded zealots in Tahrir Square, waving copies of the Koran and agitating for sharia law.

Until now a loose coalition of various congregations, political Salafism in Egypt is slowly cohering around clerics such as Magdi Hussein. In 2008, Hussein was arrested by Egyptian security forces for preaching in Israeli-blockaded Gaza after the crossing that links the Palestinian enclave and Egypt's Sinai Peninsula was briefly opened. Released after Mubarak's removal, he is now the leader of El Amal, the Islamic Labor Party.

Farahat himself is a Hussein acolyte. With Mubarak gone, he briefly considered launching his own party but instead joined El Amal. A well-known television personality, Farahat discusses religious affairs on two satellite channels financed by Saudi investors and he is frequently recognized on Cairo's busy streets. On his recommendation, we met on a temperate Friday evening in June at Felfela, a popular restaurant near Tahrir Square.

Farahat has the expansive charm typical of televangelists of all faiths and sects. With his long and thickly hennaed beard, intricately embroidered skullcap, and crisply starched and pressed dishdasha, he cut an elegant but conspicuous profile among Felfela's largely secular clientele. He took my hand and shook it vigorously, clearly relishing the chance to explain his faith to an infidel — and an American one at that.

"Islam is the only truly international religion," he began. "It is embraced by all the world and by all its minorities. Christianity espouses the killing of Jews, socialist ideology celebrates the group over the individual and capitalism does the opposite. Islam is equal across the board."

Farahat then told me about the time he spent in Tahrir Square with thousands of fellow dissidents in defiance of Mubarak and his regime. He attended the protests daily throughout the eighteen-day siege, he said, sharing meals and stories of Mubarak's treachery with every spectrum of Egyptian humanity: Christians and atheists, rich and poor, young and old. "I was taken completely by surprise by this headless movement," he said. "Those who had been silent had risen together and when it was over it was a miracle."

But the revolution has given way to an increasingly opaque future. Political parties who lack the Islamists' social networks, a potent and highly deployable asset, are calling for postponement of the fall elections. The Salafis themselves have assumed a spoiler role; they may partner up with the Muslim Brotherhood — though the June demonstration clearly strained relations between the two groups — or they may remain independent and cherry-pick support from the Brotherhood's right flank.

"We all follow the same principles," Farahat said of the Salafis and the Ikhwan, as the Muslim Brotherhood is known in Arabic. "But whereas we follow the texts literally, the Ikhwan tends to maneuver politically. They are very Machiavellian, while we Salafis have not been smart about how we express our vision because we have been isolated."

Was isolation really the problem, I asked, or was it Salafism's seventh-century answers for twenty-first century questions?

Salafis, Farahat assured me, were very much both in and of the post-modern world. He himself is a successful speculator in real estate and his daughter is an upwardly mobile executive in the information technology sector.

But what of the Salafis' extreme punishment for petty thievery, fraternizing among the sexes, and the drinking of alcohol? Would a Salafi Republic of Egypt render itself dry, thus all but bankrupting the tourism trade? (I had, by the way, checked my impulse to order a glass of Chablis with dinner. Wittingly or not, Farahat had chosen a restaurant that serves beer and wine.)

Farahat shook his head and smiled wryly. "There are things that are hadud or beyond debate," he said. "There is punishment for the sake of protecting the mind, such as the banning of alcohol, as well as constant things like family and honor. In this all religions agree. But you don't even begin to cut people's hands off for stealing until after a full inquiry into the felon's employment and financial situation can be held. If, for example, it can be proven that he could not find work and had no money and was forced to steal, his hand is spared. In the first 400 years of Islam, there were only ten such cases of hand chopping."

What of the ban on liquor? Why would westerners come to Egypt if they were forbidden to have a cocktail in their hotel bar and women were forced to cover themselves?

Again, the wry smile, uncluttered by doubt. "Islam is not against tourism," he said. "The foreigners who come here would be respected so long as they keep their alcohol concealed in their luggage and confine their drinking to their rooms. Otherwise, it's eighty lashes."

And the veil?

"Women must only reveal their faces and hands in order not to incite our shabab, or restless young men. Needless to say, there must be no public displays of affection either."

When you find yourself in a hole, so goes the old saying, stop digging. But deeper Farahat dug. Once in control of government, he said, Islamists would close down the international schools popular with Cairo's expatriate community and its well-to-do Egyptian families. "These schools have done nothing for us," he said. "Young people are being pulled into a culture that is not their own." Egypt's peace treaty with Israel, the country's foundation of economic stability for more than three decades, would be scrapped and a two-state solution to the Palestine question would be possible only if they were allowed an army of their own. "Otherwise, I will field an army of Mujaheddin," he said. "The solution will be imposed by force with five million volunteers." Egyptian Copts, the country's ancient Christian sect that accounts for ten percent of the population, would be allowed to co-exist with their Muslim compatriots "as long as they don't violate the constants of sharia law."

I asked for the bill. While we waited I asked Farahat to handicap the likely results of the upcoming election. In gathering his thoughts, he inhaled deeply and then exhaled, as if in preparation for a long-distance swim.

"In the end our government will be Islamist," he said finally. "The past era was one of secular liberalism and it was filled with nothing but crises."

Farahat may represent an important constituency in the nebulae of political persuasions now rotating around free Egypt, but I doubt it will prevail. For one thing, Salafi parochialism is very much at odds with Medieval Islam, which borrowed heavily from the Jews and Christians for its scripture, the Greeks for its philosophy, the Romans for its infrastructure, and the Persians and Chinese for its art and literature. To imply, as Farahat did, that the only good Christian is a prostrate one and to shut down centers of learning for their foreign provenance is profoundly un-Islamic, at least as Islam was practiced from the eighth century to the post-Ottoman era.

Some years ago, while eating breakfast at a hostel in Damascus, I watched on satellite television a retrospective of performances by Oum Kalthoum, the great Egyptian songstress who galvanized audiences worldwide throughout the mid-twentieth century. What struck me most about the broadcast, aside from Kalthoum herself, was the audience as it was occasionally panned by the camera. Of the thousands of attendees seated in what I assumed was the Cairo Opera House, not a single women was covered. Indeed, everyone was dressed in what seemed to be the latest fashions from Europe. Here was forensic proof of Egypt's native secularism, a tradition that predates the Islamist revival rooted in the Anglo-French partition of the Arab world after World War I. Free to express themselves in post-Mubarak Egypt, Farahat and his Salafi brethren would expel curiosity, empathy, irony, and aestheticism from the arsenal of human emotions that is the very foundation of Egyptian identity. And that is a lousy platform to run on.

ForeignPolicy.com 2011-8-17In its scramble to avoid another legislative gang war over the nation's debt ceiling, Washington is preparing to shake down the Defense Department in the name of deficit reduction. While budget cutters preoccupy themselves with line-item expenditures, they overlook the Pentagon's biggest cost center: empire. The burden of global hegemony, the commitment to project force across every strategic waterway, air corridor, and land bridge, has exhausted the U.S. military and will be even harder to sustain as budget cuts force strategists and logisticians to do more with less. A national discussion about the logic of maintaining huge forward bases, to say nothing of their financial and human costs, is long overdue.

American relations with the world, and increasingly America's security policy at home, have become thoroughly and all but irreparably militarized. The culprits are not the nation's military leaders, though they can be aggressive and cunning interagency operators, but civilian elites who have seen to it that the nation is engaged in a self-perpetuating cycle of low-grade conflict. They have been hiding in plain sight, hyping threats and exaggerating the capabilities and resources of adversaries. They have convinced a plurality of citizens that their best guarantee of security is not peace but war, and they did so with the help of a supine or complicit Congress. Since the collapse of the Soviet Union, U.S. presidents have ordered troops into battle 22 times, compared with 14 times during the Cold War. Not once did they appeal to lawmakers for a declaration of war.

The legacy of American militarism is a national security complex that thrives on fraud, falsehood, and deception. In the 1950s, Americans were told the Soviets had not only the means to destroy the United States but the desire to do so. In reality, Moscow lacked the former and so gave little thought to the latter, while Washington squandered billions of dollars on needless weaponry. Time and again, U.S. presidents weaponized their response to challenges overseas to protect them from charges of appeasement from the right. Habitually, their administrations misinterpreted events -- from Russia's Bolshevik revolution to the September 11 attacks -- to disastrous effect. In each case, expert advice was overlooked, ignored, or concealed, while in others, threats were manufactured as chips in petty political wagers. The fraudulent bomber and missile gaps and the Gulf of Tonkin incident did as much to injure U.S. interests overseas as did the notion that Saddam Hussein possessed weapons of mass destruction and intended to use them preemptively.

Only a country so rich in resources and blessed by favorable geography could afford such malfeasance. America has been spared foreign invasion for more than 200 years and it can expect to remain inviolate for centuries to come. Yet each year, it spends enough money on national security to match the economic output of Indonesia -- with money borrowed largely from China, a country with which it is preparing for conflict. It insists on its right to launch a preemptive nuclear attack against such countries as North Korea and Iran -- oafish, bankrupt regimes that seek a complement of atomic bombs because they are surrounded by countries with bunkers full of them. America guarantees its friends and allies a place under its security umbrella even if their interests, particularly in the Middle East, diverge markedly from its own. In Europe, NATO remains a feudal confederation of armed forces with no raison d'être save to lend sanction to America's far-flung military enterprises. In Asia, South Korea, the world's 15th-largest economy, remains critically dependent on U.S. forces as a deterrent against its isolated, impoverished northern neighbor, while Japan wallows in a twilight world of middle-class prosperity and political ennui, content to slowly diminish as an American vassal.

In ancient times, empires exacted tribute from their dependencies. In the age of American hegemony, just the opposite is the case. In return for the global commons, the United States bankrolls a geopolitical welfare state that allows some of its largest beneficiaries to neglect their basic responsibilities as sovereign states and allies. A national debate over the economic and moral costs of this exchange is noteworthy for its absence. Segregated from the military and its burdens, with no reason to fear the consequences of war for themselves or their loved ones, a great majority of Americans are easily manipulated into backing a militarized response to challenges more suited to diplomacy. The purpose of hegemony is to preempt potential threats rather than respond to a clear and present danger. As voters are unlikely to support such a policy on its merits, hegemonists resort to gross exaggerations of speculative rivals, be they Russia and China or geopolitical runts such as North Korea and Iran.

The price of this deception is vast. If the Pentagon were a corporation, it would be the largest in the world as well as the most sloppily run. Its procurement budget, at a staggering $107 billion in 2010, expands even as the number of deployable warplanes, combat ships, and troops diminishes. To entice lawmakers into approving costly weapons programs, the Pentagon dangles the prospect of jobs in the states and districts of key lawmakers, a costly way of manufacturing but an astute political maneuver. Waste, inefficiency, and political patronage, no stranger to military-legislative affairs, get more lavish by the year. In April 2008, the Government Accountability Office found that 95 major Pentagon projects exceeded their original budgets by a total of nearly $300 billion. A year later, it concluded that nothing had changed. In 2009, lawmakers larded the Pentagon's annual budget proposal with nearly $5 billion in programs and weapons it did not request. With arms factories scattered like feeding troughs nationwide, America has become the equivalent of a company town with the Pentagon as primary employer. The making of war, or at least the preparation for it, has become a money center, a business line --- a racket, as Marine general and Medal of Honor recipient Smedley Butler put it nearly a century ago.

Though the Pentagon did not ask for empire, neither did it shirk from its calling. From 2001 to 2010, the baseline defense budget grew at an inflation-adjusted rate of 6 percent a year, to more than double its pre-September 11 size. Like interlocking threads in a great tapestry, no one really knows where the military's preserve begins and where it ends. Pentagon financial statements have been all but unauditable since 1991, the year it began submitting its accounts to Congress. In an October 2009 report, the Defense Department's Inspector General exposed more than a dozen "significant deficiencies" in Pentagon balance sheets from fiscal years 2004 to 2008. Mining opaque audit trails and murky contracting systems, the report uncovered more than $1 trillion in unsupported account entries. In September 2010, the Senate Finance Committee issued a report that slammed the Pentagon's "total lack of fiscal accountability" for "leaving huge sums of the taxpayers' money vulnerable to fraud and outright theft."

Even as defense officials and warfighters acknowledge that America's adversaries cannot be defeated with armed might alone, the Pentagon still has more lawyers than the State Department does diplomats. Washington's foreign aid budget routinely comes under assault by Congress as overly generous when in fact the United States is among the most miserly of countries when it comes to overseas assistance. The White House has called for 2,200 new Foreign Service officers for the State Department and USAID -- a drop in the bucket given the mismatch between the nation's resources and its commitments overseas. The number of State Department diplomats and support staff is only 10 percent greater than what it was a quarter century ago, when there were 24 fewer countries in the world and U.S. interests were concentrated in Europe and northeast Asia. The Pentagon, in contrast, has 1.5 million active-duty military personnel, an equal number of reservists and National Guardsmen, and 790,000 civilian employees. Moreover, unlike the U.S. military, which bases a fifth of its personnel overseas, nearly three-quarters of America's diplomatic corps are posted abroad. At any one time, a third of U.S.-based Foreign Service jobs are vacant, while 12 percent of the overseas positions, not including those in Iraq and Afghanistan, are unmanned. Foreign language proficiency, a core competency of the service, has languished due to funding gaps. Salaries have been slashed, and stingy retirement benefits have undercut retention rates.

American embassies loom imperiously over the skylines of the world's capital cities, barricaded against terrorist attacks and estranged from their hosts. They engender resentment from without and a siege mentality from within. Thanks to the gutting of State Department and foreign aid budgets by Senator Jesse Helms, followed by the disastrously militant politics of President George W. Bush, America's diplomats and aid workers are undermanned and overwhelmed. Absent an aggressive restructuring of America's civilian aid and diplomatic agencies, their dependence on, and submission to, the military will only intensify. An early draft of the 2010 Quadrennial Defense Review, the Pentagon's long-term threat assessment, put its civilian counterparts on notice. A key provision that demanded the Pentagon's "unprecedented say over U.S. security assistance programs" was softened to the wordy but more diplomatic: "Years of war have proven how important it is for America's civilian agencies to possess the resources and authorities needed to operate alongside the U.S. Armed Forces during complex contingencies at home and abroad." In other words, civilians must be harnessed in the service of military objectives in unstable regions or post-conflict areas, rather than focus on their core mission of nurturing U.S. diplomatic interests and reducing poverty. Or, as a source close to the QDR drafting process put it, "It is clear from the deleted parts that what DOD is saying about security assistance is: ‘We want in on the whole shebang.'"

Such is the state of disequilibrium between America's civilian and military resources as it enters the post, post-Cold War world. The years that followed the end of the Soviet era were but a prelude to what will be a far more enduring shift in the topography of geopolitical affairs. For the first time in two decades, U.S. hegemony will demand a price. The transaction Washington has kept with its allies -- generous subsidies in exchange for "full spectrum" control -- will be subject to competing claims. In theory at least, this should bid up the value of nonmilitary methods of protecting U.S. interests overseas. The aforementioned QDR, however, suggests otherwise. It makes numerous and repeated references to the centrality of "access," a catchword for the U.S. military's ability to operate unimpeded anywhere in the world. It identifies as a new and enduring threat "states armed with advanced anti-access capabilities and/or nuclear weapons," a veiled reference to the evolution of China as a regional power and the kind of peer competitor that Washington has made a policy of preempting. The looming rivalry between Beijing and Washington has already replaced Islamic extremism as the main preoccupation of U.S. security planners, the same way al Qaeda filled the void left by the departed Soviet Union on the Pentagon's revolving rotisserie of existential threats. Just as Washington militarized the Cold War and its response to the September 11 attacks, so too is it militarizing its relations with China.

In 2001, the Defense Department produced a study called "Asia 2025," which identified China as a "persistent competitor of the United States," bent on "foreign military adventurism." A U.S. base realignment plan made public in 2004 called for a new chain of bases to be erected in Central Asia and the Middle East, in part to box in China. A 2008 deal between the United States and India that would allow New Delhi to greatly expand its nuclear weapons capability was established very much with China, their mutual rival, in mind. At the same time, the Pentagon is well into a multiyear effort to transform its military base on Guam into its primary hub for operations in the Pacific. While the QDR drily refers to "the Guam buildup" as a means to "deter and defeat" regional aggressors, John Pike of the Washington, D.C. based Globalsecurity.org has speculated that the Pentagon wants to "run the planet from Guam and Diego Garcia by 2015."

In March 2011, Inside the Navy reported how the U.S. government was deep in the planning stages of a major military buildup in Asia. In response, China is expanding its fleet of diesel-powered subs at a base on Hainan Island and is developing the capacity to attack and destroy satellites as well as aircraft carriers. It has also laid a provocative marker down on a cluster of islands in the South China Sea that are the subject of a simmering territorial row between it and Vietnam, Malaysia, the Philippines, Brunei, Taiwan, and Indonesia. In 2010, Beijing identified the South China Sea as a "core interest," a term it previously applied only to Tibet and Taiwan, a move that was seized upon in Washington as a de facto declaration of sovereignty over the region and an augur of Chinese bullying to come. If a Sino-American war is inevitable, it is now generally assumed that a hotly contested South China Sea may be its epicenter.

There is nothing inevitable about an American war with China, however, and even Chinese security planners believe the U.S.-Chinese rivalry will be economic, rather than military, in character. There is, however, an emerging rhythm to Sino-U.S. affairs: The Pentagon, still clinging to the spirit, if not the letter, of the 1992 Defense Planning Guidance, reflexively interprets an emerging regional power or political movement as a strategic threat. It gathers allies and punishes neutrals in an undeclared policy to isolate it. Defense analysts exaggerate the threat's military might while discounting the historical factors that inform and motivate it. Politicians in Washington convene hearings and, briefed as to the nation's ill-preparedness, demand an immediate military buildup. Pundits condemn the commander in chief for being soft on America's adversaries even as diplomats and intelligence experts overseas assure the White House that the danger is largely in the minds of those peddling it back home. Such admonitions, however, are obscured or ignored in what is now a key election-year issue. Surveillance is met with countersurveillance. Heightened alert status provokes the same. An incident occurs, either by accident or by design.